Playtech’s taxing times
It is to be hoped that Playtech’s management is not superstitious. After two tax-related hits either side of Christmas, those believing bad news comes in threes might suspect that another blow is just around the corner.
The Yuletide double-whammy of a gaming tax hike in Italy and an agreement with the tax authorities in Israel that will cost Playtech €28m as a one-off exceptional charge are strictly unrelated.
However, it shows how in gaming what has been viewed as the positive of multi-national operations utilising the best talent in the whichever location or domicile best suits can swiftly become the negative of multiple exposures to volatile tax and regulatory environments.
Of the two slices of bad tidings, the first is more significant than the second to the long-term prospects for Playtech.
The announcement from the Italian government that it would be seeking an additional €770m in taxes from the gaming sector as it attempts to balance its somewhat controversial budget didn’t come out of the blue.
As part of a package of measures, the machine sector will be hit significantly with the turnover tax on AWPs rising by 1.35% to 20.6% and VLT turnover tax rising from 6.75% to 7.5%. This will be followed in May by a further increase as machine taxes will rise again up to 20.85% and 7.85% respectively. At the same time the Dignity Decree will come into force which will see a ban instituted on all forms of gambling marketing.
The only mitigation for the gaming operators is that will be allowed to reduce their return-to-player in order to partially offset the tax hikes.
Bad news for punters then, but ultimately the whole package is worse news for Playtech which in April last year became more fully immersed in the Italian gaming market via the €846m deal to acquire one of the biggest gaming operators in Italy, Snaitech.
It remains Playtech’s most ambitious and largest acquisition – and arguably its most badly-timed deal. On Christmas Eve, the company was forced to issue a stock market statement which said the move would reduce the company’s 2019 adjusted EBITDA figure by between €20m-€25m.
It set the seal on a dreadful 2018 for what remains one of the premier suppliers in the online gaming world. As Simon Davies, analyst at Canaccord Genuity said, it meant that Playtech ended the year as it started, with a profit downgrade.
Make your own bed
Though unfortunate, none of this is entirely unpredictable. As Davies pointed out, the Italian coalition government has made plenty of negative comments around the gambling industry and it is in “desperate need of incremental tax revenues.”
Such is always the case. The modern history of Italian regulated gaming is littered with examples of opportunistic tax grabs in the wake of (seemingly ever-present) economic fragility. A quick online search will come up with numerous examples from the past 10 years of various gaming sectors either being hit with (or narrowly avoiding) new tax rises.
None of this was mentioned in the acquisition document where Playtech extolled Italy “Europe’s largest and growing gaming market, a fragmented market which is relatively underdeveloped online.”
As Davies said: “Playtech saw the Snaitech acquisition as a means of increasing its exposure to regulated markets, but in targeting an Italian land-based B2C operator, it has merely introduced a different set of risks. And the tax hikes will more than off-set likely synergies from the deal.”
Off the back of the largely Asian and UK-related profit warning earlier in the year, Playtech had already been “materially de-rated” by the market and a lot now hinges on what happens in the US in the early part of 2019 if it is to regain ground.
With Teddy Sagi having now departed the share register – pursued by activist investor Jason Ader at Spring Owl – the company will be hoping the way is now paved for Playtech to make a belated entry into New Jersey. Should it receive a B2B license there, Davies said it would be a “positive catalyst” for a business which is in need of some good news.