Paddy Power at risk from UK online tax hikes

By Geoff Percival

The prospect of an increased tax on UK online gaming revenues represents a bigger threat to Paddy Power-Betfair than the enforcement of maximum restrictions on in-shop gaming machine betting, analysts have warned.

The British government has confirmed that the maximum allowable stake on fixed odds betting terminals — or FOBTs — in UK betting shops will be slashed from £100 (€114) to £2, although this change might not come into force until 2020.

More than two-thirds of bets placed on FOBTs are with stakes of over £2 and KPMG has estimated that up to 50% of retail betting shops in the UK could be at risk of closure as a result of the move. Paddy Power-Betfair, however, has welcomed the move, with chief executive Peter Jackson calling it “a positive development for the long-term sustainability of the industry” and saying it shouldn’t have a material impact on the company’s UK retail strategy.

If the new law had come in last year, it would have equated to a £35m-£46m — or 2%-3% — hit to group revenue. “More of a concern for Paddy Power-Betfair is the suggestion that online taxes on gaming revenues will be increased. This would be a much greater concern [for the company] given its market-leading position in online,” said Merrion analyst Darren McKinley.

Online gambling businesses face a squeeze as the British government said it plans to increase remote gaming duty to offset its loss of income from the cut in the FOBT stake.

Paddy Power shares have been trading strongly this week on the back of the company entering takeover talks with US fantasy sports company FanDuel and the US Supreme Court striking down a law which has prohibited sports betting in most states for 25 years.

“While the New Jersey court outcome and broad-based opportunity in the US is certainly a positive for Paddy Power-Betfair, we assume it will take time and investment before this can be fully monetised with regard to earnings per share. Tax changes and regulatory changes continue to be a headwind for Paddy Power in the short-to-medium term. Our target price is raised to €95, which implies that Paddy Power is now fully valued,” said Mr McKinley.

The UK’s FOBT decision deals a big blow to most bookmakers, who have argued that the terminals are a major source of income for high street shops that are struggling to stay afloat as younger gamblers move online, putting jobs at risk.

William Hill said the new regulations could lead to a 35%-45% reduction in total annual gaming net revenue. Its adjusted operating profits could fall by £70m-£100m. Preliminary estimates suggest the move could result in about 900 shops becoming loss-making, with a proportion of these at risk of being closed within a relatively short time.

Ladbrokes-Coral owner GVC said it expects to be able to reposition its UK retail business within two years following implementation, with an anticipated fully mitigated impact of about £120m on group earnings by the end of this period.

Sky Betting and Gaming attacked the proposed rise in online taxes, saying “rather than punishing a UK-based jobs creator, the government should focus on getting a fairer tax contribution from other tech companies who, unlike us, don’t already pay sufficient taxes on their UK activities,” it said.

- Additional reporting Reuters

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