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NEWS 30 October 2018

Budget 2019 industry reaction: “Not as onerous as feared” or “highly unfair?”

By Tim Poole

UK Chancellor of the Exchequer Philip Hammond announced the 2019 budget on Monday and all eyes within the gaming industry were drawn to two key points.

Firstly, the Chancellor delivered a remote gaming duty (RGD) increase from 15% to 21%.

The second point of note regarded fixed-odds betting terminals (FOBT), as Hammond announced the reduction of maximum stakes from £100 to £2 will come into effect in October 2019.

Industry reaction to the news has been mixed, with a number of gambling representatives understandably emphasising the negatives.

Not as onerous as first feared

However, Davy Research published a note on Tuesday suggesting the budget is “broadly in line with current assumptions” and “not as onerous as feared” by recent speculation.

Davy’s note, compiled by Michael Mitchell and Joseph Quinn, read: “Amendments to UK gaming regulation are broadly in line with our current assumptions (and therefore less harmful to the sector than recent press speculation had suggested).

“FOBT changes are to take effect sooner than expected (October 2019 versus January 2020), with the linked increase in remote gaming duty (RGD) (to 21%) only modestly worse than previously assumed (20%).

“In broad terms, there are two general adjustments to be made. The sooner-than-expected implementation of reduced FOBT max stakes will now impact on FY19 estimates. This is just three months sooner than expected and is, in truth, just a phasing issue. It has no incremental negative impact on our current FY20 estimates (although cash balances will be lower as a result).

“The greater-than-expected hike in the RGD rate will impact on estimates (modestly) going forward. We expect the combined approximate cut to current earnings estimates to be as follows: Paddy Power Betfair FY19/FY20: -2%/-0.5%; William Hill: -9%/-1%; GVC: -6%/-1%.”

Highly unfair however you look at it

On the other side of the spectrum, gambling consultant Steve Donoughue has questioned the Budget's “highly unfair” proposals, regardless of the figures involved.

Donoughue can see parallels with the journey the tobacco industry previously underwent, describing Hammond’s government as “squeezing as much as they want” under the impression there will be no “political consequences.”

He told Gambling Insider: “It was just me and two ex-MPs I know in the bar watching the TV in parliament on Budget day. They are now lobbyists for a big tobacco firm. We have a lot in common.

“We all promote industries that have millions of customers but cause Members of the House to recoil in horror when we mention it. The difference is the tobacco industry is 20 years ahead of gambling on its road to perdition.

“The gambling industry still has the chance to follow alcohol’s route and, maybe one day, even have politicians campaign to keep gambling venues open, arguing that they’re at the heart of the community. This is unfortunately unlikely, and given the recent Budget speech, I fear the no-marketing deviant activity route of tobacco is far more likely.

“I admit I had called the budget wrong. I had said 20% RGD and FOBT stakes cut in April 2019. Phil the Spreadsheet called 21% and October 2019, so not too far off. In some ways, what is important is not the numbers but the approach. Making one sector pay for the perceived crimes of another does seem highly unfair however you look at it.

“Unless you’re already looking at gambling and thinking this is a source of tax revenue that has no political consequences, we can squeeze as much as we want and it will not hurt us politically. That is where we are unfortunately. I’m now putting money on every other tax rate not at 21% getting there eventually. Why not?”

A catalyst for increased M&A

Elsewhere, Julian Buhagiar, co-founder of RB Capital, acknowledges the rise “was not unexpected” but believes it will still hurt the UK gaming industry considerably, with smaller operators sure to contemplate “throwing in the towel.”

In particular, Buhagiar feels the new tax rise will prompt a second wave of mergers and acquisitions within the industry. Following previous increases, Paddy Power merged with Betfair and Ladbrokes with Coral in two of the gambling sector’s standout agreements, before GVC later acquired Ladbrokes Coral and the Stars Group purchased Sky Bet.

Highlighting how bigger operators will benefit, he said in a statement: “The rise was not unexpected but this doesn’t take away from the further pain many UK-facing operators are going to have to prepare for. In addition to the fallout from changes in Brexit-related legislation, this industry is constantly adapting to wave after wave of regulatory changes and, because of today’s announcement, some operators will feel like throwing in the towel.

 “We’ve already seen a spate of mega deals with the likes of GVC and the Stars Group completing major M&A transactions. Today’s rate rise will only mean one thing: that life will get tougher for smaller operators and they will either be forced to downsize UK operations, shift market focus elsewhere or sell to the highest bidder.

“We fully expect this Budget decision to be a catalyst for increased M&A, which will start as early as the first quarter of next year, and for already dominant brands to further strengthen their positions by capitalising early on these buy-side opportunities.”

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