It’s been a baptism of fire for the ludicrously named bwin.party digital entertainment Plc.
Shares in the merged bwin and Partygaming only started trading a week ago but already they have fallen sharply:
They dropped 17 per cent on Wednesday and have fallen a further 4 per cent on Thursday, following news that the German Länder want to impose at 16.7 per cent turnover tax on sports betting.
The backstory here is that Germany’s federal states have agreed to open up the state betting monopoly to private companies. The market was expecting a liberal regime but what’s been proposed is very different.
Indeed the proposed structure would make it very difficult for operators such as Bwin to make money, say analysts, (it would effectively ban sports betting in Germany) and leave the market dominated by unlicensed operators.
That’s very bad news for BPDE but also for Betfair.
The online gaming exchange is reckoned to make around 5 per cent of revenue in Germany and if this regulation is passed that income stream could dry up, says UBS.
The Swiss bank notes that around a quarter of Betfair’s income come from unregulated markets such as Germany and notes that moves are afoot in Greece (4 per cent of turnover) to ban betting exchanges.
But the bad news doesn’t stop there, particularly for BPDE. The Länder are not going to allow in-game wagers – which provide about half of bookmakers’ online business – and it will require online poker and casino operators to hold an existing land-based licence.
Whether this proposed licensing regime is implemented in its current form is open to debate.
BPDE says that the proposal is neither in compliance with EU law nor in-line with market requirements and it’s going to apply for a licence in Schleswig-Holstein, should that state succeed in implementing its more relaxed regulatory regime — a 20 per cent of gross gaming revenue on sports betting, poker and casino.
Indeed, it’s worth noting that most of what is initially proposed in terms of internet gambling legislation is ultimately watered down. That said, the proposals have the support of 15 out of 16 Minister-Presidents.
That’s certainly the line the bulls are taking, who also say punters won’t be protected by this new regime and will pushed onto the black market.
Numis Securities:
The proposed regime seems unlikely to be implemented as it would not achieve the reasonable objectives of regulation. Punters would not be protected by domestic regulation as they would likely continue to use offshore operators and the State would not benefit from increased tax revenue for the same reason. Spain and Greece both changed initial plans for turnover tax to gross profits tax.
bwin.party has announced its intention to apply for a licence in the state of Schleswig-Holstein should that state implement its planned (more practical) regulatory regime. It seems unlikely that Germany will end up with a system where online gaming is regulated in one state and operated nationally. However the threat of this happening should help keep the other states at the negotiating table. It was regulation in the state of Tasmania that eventually lead to online gaming being accepted across Australia.
But what if Germany is different? What if the legislation is passed? What’s the downside?
Nick Batram of Peel Hunt has an answer.
The group does not break down profits by country, but if we assume a 30% contribution margin, then the worst case scenario could be a c25% hit to 2013 EBITDA. At the current price the prospective EV/EBITDA to 2013 would be c7.3x. We believe that this is a relatively simplistic approach, but it does give a feel for the potential worst case scenario. Another possible outcome is that Schleswig-Holstein adopts a more favourable structure and bwin.party obtains a licence there. How realistic this is, or whether it can actually happen, is not clear.
And there won’t be much clarity of any of than until early June, when the Länder meet again.
Update: 11.00
Handy table on the impact of the proposed legislation from Deutsche Bank.
Update: 13.50
Some interesting observations from Davy on the proposed German legislation…
To our untrained legal eyes, there are certainly aspects of the draft framework above that would not pass muster with EU authorities, not least the provision that only current land-based casino operators would be entitled to win online casino licences. But assuming that German regulators are smart enough to remove the offending anti-competitive measures, there really is nothing the EU can do if a national government chooses to set its tax rates on an industry at a particular level. And herein lies the real problem: it was one thing to continue operating in Germany when national law clearly contravened aspects of EU law, it is quite another to do it simply because the new law/tax regime does not make sense. Soldiering on therefore is probably not an option, not least because it would likely make the stock un-investable for a large proportion of institutional investors.
… and the US gaming market.
had continued to operate despite the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006 would be excluded from winning online gaming licences in the newly regulated market — most notably the two market leaders, PokerStars and Full Tilt. This would result in an operator vacuum which could be filled by PartyGaming (amongst others) and whatever strategic land-based operator it decided to partner with. With the PartyPoker brand and the backing of a well recognised land-based gaming brand, the assumption was that a considerable share of the market could be up for grabs.
However, the news in the last two weeks that that Wynn Resorts has signed a strategic partnership agreement with Pokerstars to (a) lobby for US online poker reform and (b) jointly apply for an online licence in the US should the market ever regulate, does lead us to wonder if conventional wisdom may be at risk.
If Wynn-Pokerstars were to win a licence — and it remains a really big if — then the potential cheque that US regulation so long promised to bring for Party shareholders would turn out to be a lot smaller than it had hoped it would be.
Meh. A double helping of bad news.
Related link:
Bwin attacks German betting proposals – FT