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Friday, 18 September 2015

Labour’s lurch raises the stakes for gambling



By Dan Waugh, partner at Regulus Partners

One should always be careful what one wishes for.

On May 8th this year, the bookmaking industry breathed a collective sigh of relief as David Cameron’s Conservatives were returned to government by the British electorate. The spectre of an allegedly anti-FOBT Labour administration had been vanquished but few at the time suspected that Ed Miliband’s defeat would usher in an altogether more alarming era with his party lurching even further to the left.

The future of Opposition politics remains shrouded in uncertainty but the rise of Jeremy Corbyn provides a disconcerting political backdrop to gambling in Great Britain at a time when deal-making has raised the stakes on regulatory risk.

The gambling industry – and the bookmakers in particular – appear to have few friends (if any) on the new Labour front-bench, announced this week.

A quick scan of parliamentary records shows that only one member of the shadow cabinet (on one occasion) voted in favour of positive regulatory change on gambling between 2010 and 2015. Of course, this pattern was entirely consistent with the party line on these votes – but it is worth noting that Corbyn has never voted in favour of deregulation, even when Labour was in government.

More telling perhaps is the number of shadow ministers – 13 out of 26 - who have used their positions as MPs over the course of the last five years to express concern on matters gambling (via Parliamentary Questions and contributions to debates in the Commons); and nine of these related specifically to betting shops (across the intertwined issues of FOBTs, clustering and single-staffing).
Quite aside from the numbers game, this list includes some fairly vocal MPs.

Just last year, the now Shadow Secretary of State for International Development, Diane Abbott warned about the “betting shop scourge” in her constituency borough of Hackney; while the Leader of the House of Commons, Chris Bryant has in the past confessed to being “puritanical about gambling”. Of more immediate concern for the betting industry is the fact that the deputy leader of the Labour Party, Tom Watson counts the Campaign for Fairer Gambling’s Derek Webb amongst his supporters (Webb donated £5,500 to Watson’s office in October 2014). Watson did however vote in favour of increases to stakes and prizes on casino B1 slot machines back in 2013, suggesting that his animus is directed at the FOBTs rather than gambling in general.

Of interest to the gambling industry at large will be Luciana Berger’s focus on the issue of gambling addiction. The shadow minister for mental health is believed to be interested in shifting the onus of problem gambling from charitable organisations to the National Health Service – and that way may lie tighter regulation and tax hypothecation.

Outside of Parliament, Sadiq Khan’s run for Mayor of London is likely to keep gambling regulation – and FOBTs in particular – in the headlines. Khan has already made use of the FOBT issue to win his party’s nomination (with Tessa Jowell unable to shake her ‘pro-gambling’ tag a decade on from the Act) and is likely to continue to do so. This is against a backdrop of incipient devolution of gambling regulation, where the granting of limited FOBT licensing powers in Scotland may well prove to be the thin end of the regulatory wedge (see http://regulusp.blogspot.co.uk/2015/05/patriot-games-scottish-nationalism-and.html) .

Industry will take comfort in the fact that Labour remains the party of Opposition and that Corbyn is perceived to be ‘unelectable’ as Prime Minister. It is a view that ignores the facts that the improbable happens in politics more often than is acknowledged (and that ‘Corbynism’ appears to be in the vein of of a wider global political movement) and that policy formation tends not to be the exclusive preserve of the majority party.

Corbyn’s own record in Parliament suggests that he does not perceive gambling to be an issue of national importance but that does not mean that he and his team are not prepared to exploit it as a means to embarrass both the Government and the rump of ‘Blairites’ on the back-benches. The issue of FOBTs in particular is one where Labour should be able to make common cause with the SNP in order to put pressure on Cameron's slender majority.

We simply don’t know whether Jeremy Corbyn’s leadership of the Labour Party proves to be a seminal moment in British politics or simply a colourful interlude. We can only deal with the facts as they stand; and in the changed political environment, the barometer of regulatory risk in gambling may just have swung again. 

Monday, 7 September 2015

Achtung Paddyfair!




By Paul Leyland, Founding Partner


“Actions speak louder than words. In the days to come the Goddess of Victory will bestow her laurels only on those who are prepared to act with daring.” Heinz Guderian


It is axiomatic that most armies prepare to fight the last war, just with more resources. Those armies tend to lose. For nearly a decade, scale and operational efficiency (alongside regulatory risk) has tended to decide the winners and losers in remote gambling: the game has got bigger, but (outside the regulatory landscape) it hasn’t really changed. However, it may be about to…

The potential merger announced between Betfair and Paddy Power initially surprised everyone. 

However, it only takes a few seconds of reflection to see this as one of the most ‘obvious’ and compelling deals available in gambling. The positives were already well rehearsed within minutes of the announcement, and at least partly reflected in the share price reactions: highly complementary product and brands (sophistication through to entertainment); complementary culture (bright, tough, hard-working and data-driven); stronger technology and trading capabilities; significant revenue and cost synergy potential. If there is a defensive element to the deal it is that double-digit growth is becoming increasingly hard to come by in maturing markets: but that is what M&A is for.
Over and above the (very important) points listed above, there are three further reasons why I believe this deal is so compelling.

First, the genuine ubiquity of product and customer reach. Pretty much all sports betting customers sit somewhere on an axis of price-sensitive sophistication to offer / fun-driven entertainment. Betfair owns one end of the spectrum, Paddy Power is the strongest player seeking to dominate the other (with increasing competition from Sky Bet). It was always going to be difficult to turn Betfair into a mass-market brand without diluting it: that was a strategic growth problem for Betfair that has been brilliantly solved. Equally, Paddy Power’s opportunities for genuine differentiation were always going to be constrained by sitting on the same ubiquitous technology stack as everybody else: that problem may too be solved. 

Moreover, since most customers move about within the price-entertainment spectrum according to product etc, the opportunities for cross-sell and highly sophisticated insights-driven marketing are huge. So the combination of Paddy Power and Betfair dominates the sports product and brand spectrum while also increasing flexibility to adapt. For a sector with a relatively rigid structure that struggles with containing CPA and struggles even more with retaining customers, this new flexibility from a major competitor could be a huge headache.

Second, the merger creates the scale to really innovate. Pre-synergies, combined revenue will be c. £1bn, EBITDA c. £320m and a technology spend of over £100m. Moreover, this scale is combined with a culture of low regulatory risk, strong work ethic and data-driven brain-power. That is a recipe for productivity-driven growth, rather than the sector default strategy of buying market share with marketing money or bolt-ons. In other words, the combination has the scale and skills not just to be a leader of the pack, but to redefine the pack; as Apple did to Nokia/Microsoft/RIM or Google did to Yahoo! The competitive problem with this is while the leader is focussed on growing the segment (as industry leaders should but so rarely do in gambling), it takes market share directly as well as relatively, almost effortlessly.  The requirements to turn this potential into reality should not be under-estimated. However, nor should the ramifications for the sector if the combination gets it right.
Third, timing, they say, is everything. 

We have seen the Ladbrokes – Coral merger maths work because Coral is on its way up about as fast as Ladbrokes is on its way down. The danger here is that this is the sort of ‘convergence criteria’ that might have put Britain in the Euro where it not for wiser heads. Similarly, the run-rate EBITDA of both Betfair and Paddy Power is now very similar (c. £160m), while so is the market-cap. A year ago, before Betfair CEO Breon Corcoran’s textbook operational turnaround, market valuations were very different; three years ago profitability was even more starkly different. Only six months ago, the impact of POCT was still relatively uncertain. Now, and really only now, the stars have aligned to allow this deal to happen in such a compelling way. It is a sign of superlative leadership to strike with full force as soon as the opportunity presents itself.


Veterans of Paddy Power will remember with amusement that a certain senior industry exec once said of his company’s move into Ireland: “Watch out Paddy Power, we’ve parked a tank on your lawn”. That company has since ignominiously retreated from the republic faster than a Char B on the Meuse. Similarly, Betfair’s coffin-wielding reports of the demise of the bookmaker was very much exaggerated: this now really is a case of if you can’t beat them… In contrast to previous empty sabre rattling, I think the Paddy Power – Betfair combination really will be a game changer for the sector.