Analysts are betting on more mega-mergers after Paddy Power's deal with rival Betfair
The costs of the online betting revolution and tougher tax rules are galvanizing the gambling industry into action.
Paddy Power Plc's planned combination with Betfair Group provides the latest example of how companies are joining together to cope with a clampdown by governments, while ensuring their place at the booming table for digital gambling. They're not the first to amalgamate, and they're unlikely to be the last.
"What's motivating a lot of this is the push to digital," said Professor Leighton Vaughan Williams, director of the betting research unit at England's Nottingham Business School. "By merging, you are increasing scale. It gives you more to invest in technology and marketing."
Even before Betfair and Paddy Power announced their tie-up on Wednesday, gambling companies had announced $9.1bn of deals this year, the most in a decade, according to data compiled by Bloomberg.
Companies are partnering up to fund the increasing costs of remaining competitive in the €35bn online gaming market, while also coping with increases in tax and regulation.
"To maintain dividends and create scale, the market is having to consolidate," said Warwick Bartlett, chief executive of researcher Global Betting and Gaming Consultancy. "The market is ultra-competitive."
One possible deal still to be done could see a combination of Unibet Group and Stockholm-based Betsson, according to Bartlett. The companies rank seventh and 10th, respectively, in his online-gaming rankings.
Unibet, which has a market value of €1.9bn, is based in Malta and its stock is listed in Stockholm. A representative for Unibet said the company never comments on speculation. Betsson, which has a €2.1bn market value, declined to comment.
At the end of last year, the UK made all wagers placed by bettors in the country subject to a 15pc consumption tax, preventing companies from escaping the duty by locating themselves offshore. Such is the intensity of competition that companies have funded the additional burden themselves, rather than risk losing customers. "This has been very costly to the big companies," said Vaughan Williams.
The cost of maintaining a competitive online offering is another reason behind a wave of deals that has seen Ladbrokes agree to acquire Coral Group, and a bidding contest for Bwin.party Digital Entertainment.
A merger can give companies greater scope to invest in both marketing and technology, keeping them ahead of the competition, Vaughan Williams said. "You live or die in the modern gambling world by your digital platforms," he said.
Paddy Power and Betfair shares both surged by 20pc on Wednesday as analysts predicted that the merger would create one of the industry's fastest-growing businesses.
The companies are still finalising the terms of the merger, under which shareholders of Dublin-based Paddy Power would own 52pc of the merged entity and London-based Betfair's investors would hold the rest.
The merger will create the second-largest online betting company, according to Bartlett. Together, the companies have annual net winnings of €1.2bn, he estimates, compared with about €1.7bn for closely held market-leader Bet365.
"Combined, the product offering will be as good as, if not better than, all leading competitors," David Jennings, an analyst at Davy in Dublin, said in a note. "We see substantial value creation potential." (Bloomberg)