POC tax the main reason behind M & A in the UK, law firm says
The point of consumption tax has been labelled as the primary reason for recent M & A activity in the UK gambling market by a gaming law firm.
Operators offering real-money gaming services to UK customers are required to pay a 15% remote gaming duty on profits, following a change in law in December to tax operators at the point of consumption as opposed to the point of supply.
I think we will continue to see further M & A activity as the market in the UK adjusts to point of consumptionJohn Hagan
John Hagan and Bahar Alaeddini, representatives of Harris Hagan, spoke to Gambling Insider about the effects of the new law, and Hagan thinks it explains much of the reason behind M & A developments in the UK market.
It was announced in July that Ladbrokes and Gala Coral had agreed the terms of a recommended merger, and Paddy Power and Betfair confirmed in August they had reached agreement on the terms of a recommended all-share merger, with both mergers awaiting approval from the Competition and Markets Authority.
Hagan said: “The European trend towards point of consumption licensing, regulation and taxation is the single most important factor underlying all the M & A activity we have seen recently.
“There is a huge level of increased costs for operators and the only meaningful way to mitigate the impact is through consolidation and the greater efficiencies of scale which that brings.
“I think we will continue to see further M & A activity as the market in the UK adjusts to point of consumption. The profitability of the UK market got significantly smaller overnight and it was inevitable that there would be a reduction in the number of operators. Once the big deals have gone through in the new year, the major players will I am sure be circling the waters for further opportunities amongst the small to medium operators.”
Alaeddini said: “When the point of consumption licensing regime came in, most operators were not used to being regulated by the UK Gambling Commission and have needed to step up anti-money laundering, social responsibility and customer funds protection measures. A year on, operators are undoubtedly getting to grips with the flavour and tone of gambling regulation in Great Britain, but a long road lies ahead.”
There have been a number of examples of operators in part explaining their financial performance this year as a result of the tax, such as William Hill stating that its group operating profit being down 12% year-on-year to £155.7m for the 26 weeks ended June 30 was impacted by an additional £44m in gambling duties from the tax and an increase in machine games duty rate.
Ladbrokes said its 36% year-on-year drop to £24.6m in group operating profit for the second quarter of 2015 was in part driven by the new tax law.
Hagan said: “The new tax is painful for operators, but like all taxes it is probably here to stay and the political challenge will be to ensure it does not go up from 15%. Operators are keen to ensure the market understands the impact of the new tax on their profitability. At least next year they won’t have to worry about the comparison, but this barely qualifies as a silver lining.”
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