BDO director: UK operators using RGD hike to re-evaluate cost base and consider M&A opportunities

As the dust begins to settle on the April Remote Gambling Duty increase in the UK, online and land-based operators are re-evaluating their positions and their cost base within the market.

Speaking during iGB Live’s first M&A Summit in July, BDO corporate finance director Ollie Woodward told iGB the focus for a number of operators was to consider the sustainability of its player base.

Entain last week announced a significant restructuring of its operations, which could result in up to 500 global roles being cut. Although it emphasised the overhaul was actually not in response to the UK tax hike.

Meanwhile, other players like Bally’s Intralot viewed the tax hike as an opportunity. They swooped in to acquire Evoke after the operator reported various struggles, including its response to the tax hike. Bally’s Intralot CEO Robeson Reeves told analysts in April the deal would support its European expansion plans.

Restructuring and M&A efforts have become a priority for operators navigating today’s UK market, and Woodward says these conversations are dominating BDO’s gaming M&A team’s current workload.

Re-evaluating people and technology

“[Client] conversations have evolved to ‘how do we look at our cost base and right size that?’ Obviously, it’s a balancing act and many of our clients and operators feel that if they can stay strong in this period, there will be market opportunities with some smaller players not being able to effectively live with these tax changes,” he says.

“[The tax hike] comes at an intersection where I think a lot of businesses would have been looking at their cost base from an AI perspective anyway. I would say some of the larger, more established players are really looking at their people, their technology and saying, ‘How do we, how do we evolve this, right size this? There must be a margin benefit there.'”

He says the BDO M&A team is currently working with around five or six UK gambling businesses through “big transactional processes” across the B2C online and land-based sectors and the online supplier side.

“Some are looking to new markets outside of the UK, places like Canada with Alberta going online, thinking ‘Look, we need to look at other markets for growth here.'”

How are player cohorts evolving?

Woodward says analysing how player cohorts are and will continue to evolve over the next year, is an area of focus for operators in the post-RGD hike landscape.

This includes considering return-to-player (RTP) rates, marketing mix and marketing spend. “Ultimately, it comes down to the sustainability of your earnings and your player base,” he notes.

Although the RDG hike has inevitably squeezed sector margins, the overall sentiment among clients, Woodward notes, is “resilience and bullishness” as operators explore ways combat that strain.

Reporting unregulated revenue

Speaking during BDO’s panel at the iGB Live M&A Summit, Woodward highlighted the huge importance being placed on reporting regulated versus unregulated revenues, in today’s M&A landscape.

Reporting unregulated revenue is crucial from a sell-side perspective, as buyers are increasingly seeking extremely highly regulated oppotunities.

Notably, major industry players like Bet365 and Yolo Group have been actively exiting or downsizing their black or grey market operations in the last year or so.

When asked after the panel about the process of reporting one’s unregulated revenue split during a due diligence or deal process, Woodward says the first question for companies is “from a legal and structuring perspective, are you able to ring fence those operations if you’re trying to go through either a sale or a carve out?”

“Otherwise it becomes very difficult to separate those operations,” he adds. “But then, from an operational perspective, I don’t think you’ll find most businesses are already reporting on their individual KPIs down to a level where they’re able to quite easily separate those. Actually understanding the value of those different parts of the business can be done quite easily.”

Regulated revenues much more attractive in potential M&A

He acknowledges than in today’s gaming M&A landscape regulated revenues are being deemed as more attractive. 

“They’re easier to exit. They’re attracting higher multiples. A lot of the big groups are moving towards either 90 plus percent regulated or at least soon to be regulated. So you are seeing this kind of divergence between the operator base.”

From a reputational perspective, players with legacy unregulated revenues or operations are not to be immediately blacklisted when it comes to a possible deal.

Instead, Woodward says it very much depends on what those acitvities looked like. Do they include operating in grey markets pre-regulation, but then applying for and receiving a formal licence once legislation is in place?

That might be perceived very differently to operating in black markets where online gambling is actively illegal.

“It definitely is something that people look at and people want to understand what were the management decisions at that time. Were they made in a sense that they thought these markets might go live, and how did they act actually when they did become regulated?” Woodward concludes.