A report in The Times suggests the government has put its review back on the agenda, after it was shelved during the summer’s political chaos, with some in government now pushing for a pre-Christmas publication.

A Department for Digital, Culture, Media and Sport spokesperson told 9fin: “We are determined to protect those most at risk of gambling-related harm and are working to finalise our White Paper which will ensure our gambling laws are fit for the digital age.”

The White Paper was first announced in 2020 and was scheduled to land last year. White Papers set out proposals for future legislation. The paper is expected to take aim at online gambling, which has boomed in the years since current gambling legislation was introduced in 2005.

As flagged in 9fin’s preview of 888 Holdings’ LBO debt syndication, the government is unlikely to be so strident as to strangle the industry – especially given its tax contribution (£3.2bn tax in 2019, per an EY report commissioned by the Betting & Gaming Council trade body).

Nevertheless, the industry’s fear of margin compression is palpable.

The Guardian revealed in May that executives from Bet365, Entain and Flutter appear to have lobbied tax specialists from the Treasury and Revenue and Customs departments last year, with the industry representatives warning officials that tighter regulation could spur black market gambling.

This line of argument was repeated in a press release issued by the Betting & Gaming Council last week, flagging the findings of a YouGov survey it commissioned that show 67% of gamblers thought compulsory stake limits risk “pushing punters to the growing gambling black market”.

Anticipated White Paper Measures

Although the exact content of the White Paper remains unknown, The Times reported the government hopes to implement a maximum wager on online slots between £2 and £5, with larger bets only allowed for those who pass an affordability check.

Other expected measures include “non-intrusive” checks on gamblers’ financial position, more stringent age-verification, and the establishment of an ombudsman to settle disputes.

Proposals to ban free bets and incentive packages for high-value players, as well as a prohibition on football strip advertising – which were reportedly previously on the cards – are said to have been dropped. A separate report in The Daily Mail suggested that restrictions on gambling advertising and a mandatory levy on betting companies have also been ditched.

And regulation on land-based casinos may actually be loosened, according to The Times, with more physical machines permitted in casinos and options to grant credit to well-off foreigners.

Spinners and Losers

A 9fin document search for companies which have highlighted the UK government’s White Paper as a significant business consideration finds that 888, Entain, Flutter, Inspired Entertainment and Playtech have all flagged the potential for reforms to bite.

Yield curve of gambling company bonds

Despite being New York-headquartered and Nasdaq-listed, gaming services company Inspired Entertainment (B2/N.R./B-) highlights the UK Gambling Act review as a risk factor in its bond prospectus. Indeed, of the above-mentioned issuers, Inspired generated the highest proportion of revenues from the UK – some 77% of its $132m revenues in H1 2022.

But unlike the other issuers, the bulk of Inspired’s sales come from providing and servicing physical machines in its gaming and leisure segments (combined, 72% of H1 sales), compared to its relatively limited online games offering (8%) and virtual sports product (19%).

At present, the main restrictions on land-based casinos relates to the number of tables and slots permitted in a venue. If The Times’ predictions for a loosening of regulation on land-based venues proves accurate, Inspired could end up a beneficiary of the changes.

Based on proportion of revenue by geography, London-listed 888 Holdings (B1/B prelim/BB-) is the next most exposed to any regulatory changes. In H1 2022, pro forma for its acquisition of William Hill’s non-US assets earlier this year, 888 generated 66% of its £943m revenues in the UK. Of that total, 38% was UK online and 28% was UK retail.

888 Holdings is hosting its capital markets day on Tuesday, and announced it is considering tapping the debt market to refinance loan debt it used to redeem William Hill 2026 bonds.

The next most exposed to the UK is London-listed Entain Plc (Ba1/BB/BB), which operates brands including Coral and Ladbrokes. In H1 2022, it generated some 49% of its £2.1bn revenues in the UK. Entain does not break out its UK revenues by online and retail, however on the group level some 69% of revenue is generated from online, while 30% was retail.

In response to a 9fin query, an Entain spokesperson said the government review “represents a great opportunity to make the UK’s regulation fit for purpose in the digital age, and supports our priority of providing a safe and enjoyable environment for our customers […].We are extremely encouraged that the Government is taking an evidence-led approach, and look forward to working together constructively to update legislation which puts customers first while ensuring the future of the many thousands of people employed in the UK gambling industry.”

Flutter Entertainment Plc (Ba1/BB+/BBB-), another London-listed operator whose roster of betting outlets includes Paddy Power, Betfair and Sky Betting & Gaming, reported that in H1 2022, some 32% of its £3.4bn revenue was generated from the UK and Ireland. Of that total, 28% was UK & Ireland online while just 4% was UK & Ireland retail.

Flutter has already implemented a range of measures in advance of the White Paper, including a £10 stake limit for online slot products, noted a person familiar with the matter. Safer gambling measures introduced by Flutter in 2021 have already led to a £150m annualised reduction in UK and Ireland revenues, the person noted.

Unlike most of the gambling operators mentioned above, London-listed Playtech Plc (Ba3/BB/N.R.) is by origin a gambling technology provider, with most UK sales being B2B. In H1 2022, only 15% of its €867m revenues were generated in the UK, with 7% being B2B and 4% being B2C (and most of the remainder made up of discontinued operations), making it one of companies least exposed to the UK market.

Others companies to mention the White Paper in their corporate literature include US-based gaming equipment and services provider Scientific Games, as well as UK TV network ITV on the basis of ad revenue it receives from the sector. It appears doubtful regulatory reform will prove material for either – SciGames does not list significant ongoing UK exposure, while ad restrictions have reportedly been omitted from the White Paper.

A representative for Flutter declined to comment. A representative for 888 directed 9fin to Tuesday’s capital markets day presentation. Representatives from Inspired Entertainment and Playtech did not immediately respond to requests for comment.

Affordability Checks In Focus

While many of the measures expected in the White Paper appear aimed at reducing harm, social responsibility failures do already carry a regulatory cost for operators. For example, 888 Holdings was fined £9.4m in March by the Gambling Commission, in part for giving an NHS worker a monthly deposit cap of £1,300, despite knowing they earned £1,400 a month.

Situations such as this are “driven in large part by the fact that the operators are left to make up their own rules by the regulator”, according to Charles Cohen, founder of Department of Trust, a company providing affordability and financial compliance services to the gambling industry using Open Banking.

At present, gambling operators set an internal affordability threshold – usually a deposit or spend level – based on the individual operator’s risk appetite. When a player reaches the threshold, their account is suspended until they provide the operator with documents proving they can afford to continue gambling.

However, the vast majority of players refuse to comply with these requests, explained Cohen. When players do comply, operators have to dedicate resources to processing the players’ bank statements.

“This means that companies have had to choose between the certainty of losing good customers, with the risk of being fined for not looking after them […] It’s becoming a crisis for the operators, because, without industry-wide consistent standards compliance it can become a competitive disadvantage. No-one wants that,” Cohen told 9fin.

While reliable figures are hard to come by, a significant portion of operators’ profits appear to be generated from a limited group of high-value gamblers.

Research from University of Liverpool academics and commissioned by charity GambleAware suggests the 5% of highest spending betting accounts generated 86% of gross gambling yield (wagers minus winnings).

Given the potential importance of a limited number of prolific gamblers to the industry’s financial health, the industry has fretted that regulatory measures aimed at curbing problem gambling could have an outsize impact on margins.

But while having clearly defined, legally mandated affordability thresholds may be burdensome for operators at first, the industry will most likely eventually develop systems to automate such checks – which may, on a net basis, have a relatively limited financial effect on operators, said Cohen.

“There are probably two sides to this. On the one hand, operators will stop taking money from people who, frankly, they shouldn't be taking money from. […] But the other side of it is that these checks will also enable operators to avoid a lot of the losses that they're currently experiencing, that are buried in the P&L, because of fraud, bonus abuse and unnecessary blocks and limits on player spend when they can, in fact, afford it,” he continued.

Slicing The Slots

It is difficult to estimate the potential impact on margins that any regulatory reforms may have before the details of the White Paper are available. However, as part of a lender presentation published in June, Gibraltar-based betting firm 888 Holdings conducted an illustrative sensitivity analysis under a scenario where the government introduces a £2 maximum online stake.

Based on research by sports and leisure consultancy Regulus Partners suggesting such a stake limit could reduce UK industry revenues by around 6%, 888 Holdings estimated it could lose roughly 15% (equating to £55m) in online slots revenue, resulting in a roughly £16.6m EBITDA hit.

888 Holdings did not attach any illustrative figures for changes to affordability checks, but noted that “depending on the details, there could be an impact on the size of the addressable market”.

The company noted in that it is already taking a range of measures in anticipation of regulatory changes, including lowering the threshold for affordability checks to £500.

888 Illustrates Impact Of Stake Limit