Pulse

Third Bridge: Structural change ahead for global gambling

By Lewis - 23 February 2021

Harry Barnick – Senior Analyst, Third Bridge

For many the economy looks troubled, the stickiness of habits developed during the pandemic are being questioned, and frankly many of us are just taking life day by day. But for me, now is exactly the right time to do your best futurology.

For in 2021 all of the necessary conditions are present to reshape a number of industries beyond what we have already witnessed in 2020. I’d put gambling near the top of that list. I believe we’ll see a gold rush around US gambling, waves of international M&A, and increased regulatory activity in the UK online gambling market.

THE US: GOLDRUSH ACCELERATED

The US gambling market is young and full of promise, with regulation opening up states for land-based and online sports betting. The customer base of brick and mortar casinos points to latent demand and mobile sports betting and iGaming are taking off. This is spurring global interest and billion-dollar transactions.

US Casinos have long been magnetic places and in some cases, part of an international Mecca for gaming enthusiasts. But 2020 has been brutal for places like the Las Vegas strip. The risk of infection, lockdowns, and international travel bans have seen venues opening well below capacity, closing their doors intermittently, and even permanently.

Highlighting this point, the US Bureau of Labor Statistics says the Las Vegas metro area has the highest unemployment rate of America’s largest 51 cities. This is one of several reasons big US land-based casinos are looking for diversification and alternate ways to leverage customer data.

At the same time the regulatory environment is facilitating a shift into sports betting, with Covid aiding these conversations by encouraging regulators to discuss the opportunity for online sports betting.

The lockdown has ravaged state budgets so lawmakers are looking for innovative ways to create jobs and refill their coffers. The risk-reward balance of gambling is an obvious place to look. Each state operates a limited system of licenses or skins. These span casinos, racetracks, and mobile betting. With each licence opportunity heavily over- subscribed, competition is fierce.

Experts indicate that market share is a key consideration for States when skins are allocated. Consequently, land-based casinos and sports betting companies alike are vying for a top spot. So far, FanDuel and DraftKings are leading the way. In the context of these competitive dynamics, land- based casinos have suffered significant tax revenue declines due to the pandemic.

Simultaneously, mobile sports betting and iGaming are taking off. According to the American Gaming Association (AGA), the four iGaming states, excluding Nevada, generated $154.2m in revenue in November, just shy of October’s record of $156m.

Meanwhile, the US sports betting market has grown again as Tennessee became the 19th commercial sports betting state to go live on November 1, taking $131.4 in wagers. With millions of US citizens facing months of further disruption to their normal patterns of life, the case for mobile sports betting and iGaming look stronger than ever.

WAVES OF INTERNATIONAL M&A

In November, William Hill’s shareholders agreed to a cash offer made by Caesars Entertainment of 272p per share. This came after US private equity firm Apollo made a separate bid to take over the UK betting firm.

Whilst Caesars has a big reputation in land-based casinos, its sports betting offer has lagged behind its core operations. The casino owner has long focused on a more traditional, older customer demographic, in a landscape full of well-established technology players.

This means that although Caesars boasts a large active customer base, cross-selling into sports betting has been a challenge. In comparison, DraftKings and Fanduel have a smaller number of total customers, but a greater opportunity to cross-sell. William Hill brought a better, and recently improved, online product capability as well as an existing base of avid sports betters.

Combining a big US brand with a European heritage partner that possesses all the necessary expertise to run a compliant sportsbook could impress state governors and mean the merged entity picks up more than its share of new skins. Indeed, experts have also indicated that a rich operating history of safe sports betting is a key consideration in awarding skins.

This dash for technology and compliance was repeated in January as MGM Resorts International made a failed £8.1bn bid for the betting group behind Ladbrokes and Sportingbet. Entain has a rich history of operating sportsbooks and this would have been highly attractive to MGM as it looks to grow its sports betting offer in the US.

MGM would also be keen to cross-sell its existing land-based customers into sports betting. MGM had until February to make a formal bid under UK takeover rules, after it was reported that the casino operator had made a proposal to buy Entain, with which it already operates a US joint-venture called BetMGM.

MGM Resorts said it had decided not to step up its interest “after careful consideration and having reflected on the limited recent engagement between the respective companies.” Takeover regulations mean MGM must now wait six months before it can return to the table with an improved offer.

However, it seems Entain has its own plans: with the Chairman announcing a number of significant deals in the pipeline, following the recent acquisition of Enlabs, an operator in the Baltics. We’ve also seen Flutter Entertainment invest some $4.2bn in FanDuel, only to see its shares rise over 50 per cent in 2020.

INTENSE PRESSURE ON THE UK MARKET

As online sports betting has taken off due to the pandemic, the UK government has been clear that it will regulate the sector where necessary.

Post-FOBT regulation, the UK online market was treated as an opportunity to offset declines in the retail landscape. The fear amongst companies like Entain, William Hill, Flutter and Bet365 is that stake limits, increased affordability checks and potential limits of winnings, losses and deposits will decimate the revenue potential of this channel.

Experts indicate that tax rises could be the first point of call as the UK Government seeks to pay-down its Covid- deficit. Whilst this would be a blow to the UK operators, a £2 stake limit online would have a much more significant impact. Operators have tried to argue that significant limits online would push customers into the black market.

The government believes these concerns are over-exaggerated. With the Gambling Commission’s role also being scrutinised, 2021 and 2022 are set to be a rocky few years for the UK online landscape.