25 May 2010
Widespread industry consolidation has been a burning issue in the European online gambling sector for some time now, with many industry participants and commentators predicting that 2010 will see the start of large scale mergers and acquisitions amongst key players on the market. Robert Willis, an Associate at Olswang, discusses the latest developments in Europe and the US.
There can be little doubt that the relatively young gambling industry has many characteristics of a market that is ripe for consolidation. At the moment, it is an extremely fragmented market, with no group having a share of the European market by revenue in excess of 8%. There are numerous examples of potential combinations between online-only companies, and online and landbased companies that could be underpinned by compelling economic and strategic logic. Although no tie-ups between any of the online gambling heavyweights have been announced yet, there have been a number of other deals announced which demonstrate the commitment of some of the leading European actors in online gambling to grow through corporate acquisitions. Recent noteworthy deals include:
- William Hill's acquisition of certain assets from Playtech to create William Hill Online;
- PartyGaming's acquisition of Cashcade, owner of several UK bingo brands;
- Bwin's acquisition of the Italian online gambling operator Gioco Digitale;
- Mangas Gaming's acquisitions of online gaming sites Betclic, Expekt, Bet-at-Home and a 60% stake in Everest Poker;
- 888's acquisition of the UK online bingo company Wink Bingo; and
- Playtech's acquisition of a strategic stake in Sportech.
But what of the much anticipated industry consolidation on a large scale? The current poster child for the onset of the mega deals has been the speculation surrounding a tie-up between London-listed PartyGaming plc and Vienna-listed Bwin Interactive Entertainment AG. With market capitalisations of approximately £2.2 billion and €2 billion respectively, analysts have suggested that a deal of this size could be the catalyst required to encourage other key players to join forces.
With many companies in the sector having the potential to be both acquirers and takeover targets, a PartyGaming/Bwin deal could be the transaction that gives others the confidence to formalise their merger ambitions. One can be certain that senior executives at the likes of Ladbrokes, Sportingbet, 888 and Unibet - just some of the big online names who have also been the source of consolidation speculation - will be watching on with great interest if anything comes out of these alleged merger talks. Few commentators would argue that any deal between PartyGaming and Bwin, were it to occur, would be anything other than a good fit. The reputation of Bwin's sportsbook would fulfil PartyGaming's desire to develop its offering in this area and PartyGaming's strong casino, poker and bingo brands would provide a significant boost to Bwin's presence in these markets.
Norbert Tuefelberger, co-Chief Executive of Bwin, has been widely quoted as saying that Bwin is well positioned to take advantage of industry consolidation and that he expects Bwin to emerge from this round of consolidation as one of the bigger players.
Jim Ryan, PartyGaming's Chief Executive, has for some time maintained that a merger and acquisition (M&A) is a key part of its strategy, and that the acquisition of a leading online sports book would help PartyGaming realise its ambition to be among the world's top three operators in each of poker, casino, sports and bingo - its four core gaming verticals.
However, other than a regulatory holding announcement released by PartyGaming that it was 'continuing to hold discussions with a number of companies in the gaming sector regarding potential consolidation', neither side has made any comment on the press speculation.
The USA
It is well known across the industry that PartyGaming has positioned itself to be a key player in any industry consolidation. The healthy cash reserve on its balance sheet some $120 million in February 2010 with the ability to raise funds on the capital markets (which themselves are starting to become more receptive as investor confidence returns) are clearly helpful attributes in any M&A market, but the key differentiator for PartyGaming is the non-prosecution agreement it concluded with US authorities in April 2009 with regards to its activities prior to the change of the law, known as the Unlawful Internet Gambling Enforcement Act.
PartyGaming's $105 million settlement allows it to pursue consolidation activity in the knowledge that it is no longer subject to retrospective actions for its involvement in the US online markets. It has been suggested that the settlement has helped bring certainty and confidence to the online gaming sector as a whole, with some analysts commenting that capital markets now have a better understanding of the potential exposure of US customers to other online gaming companies before October 2006.
With this in mind, one would expect that 888 and Sportingbet - which also had US customers before October 2006 - will, at some stage, announce that their ongoing negotiations with the American authorities have also reached a conclusion, thereby enabling them to enter into the M&A frame.
Europe
So what could stop a PartyGaming/Bwin merger or, indeed, any other M&A activity between large-scale European online gambling groups? With the US market closed for law-abiding European operators until further notice, uncertainty surrounding the regulatory position in continental Europe is currently creating the biggest difficulties for would-be deal makers in the sector. It is well known that the legality of online gambling across certain EU Member States is currently the subject of a considerable amount of judicial wrangling, the intricacies of which have been discussed previously in this publication, but are beyond the scope of this article.
As a result, there are stark legal differences between EU Member States in relation to the regulation of online gambling and, in certain jurisdictions, the applicable legal landscape is best described as 'grey'. Notwithstanding that it is prohibited to provide online gambling services in many EU Member States, many operators currently generate significant levels of revenue in these countries, on the basis that such national rules are contrary to EU law (commonly referred to as the 'EU defence').
However, two recent Opinions issued by Italian Advocate General (AG) Mengozzi in relation to the application of EU rules to Germany's national gambling rules, known as the Interstate Treaty on Gambling, have called into question whether this exploitation will remain legally tenable in the future. If the European Court of Justice (ECJ) follows AG Mengozzi's Opinions (and generally AG Opinions are followed), this could have a significant impact on European offshore gambling operators who carry out business in Germany and other European jurisdictions where online gambling is prohibited or permitted only by locally licensed operators.
Any operator which generates significant amounts of revenue from customers located in jurisdictions such as Germany can never be certain whether future ECJ decisions could result in them losing a significant level of revenue and even raise questions about their own levels of probity. In the context of M&As, especially high value and high-profile M&As, this starts to present a real hindrance to closing deals and some commentators have suggested that for so long as this uncertainty remains, this could ultimately stop any large deals involving operators exposed to such problem jurisdictions coming to fruition. Question marks about the sustainability of significant revenue streams against an uncertain legal backdrop clearly create significant hurdles for agreeing valuations and therefore pricing for transactions.
In addition, the potential threat to the probity of an operator wishing to engage in M&A activity could act as a serious deterrent to the adviser, investor and lender communities, without whom such transactions cannot be executed. The new EU Commissioner for the Internal Market, Michel Barnier, has indicated that he wants to harmonise the regulation of the European gambling sector during his five-year term. If successful, he should bring legal clarity for the European market. However, this will not be an easy or quick project and, for this reason, it seems possible that the 2010 prediction for M&A activity amongst the key European operators may be a little premature. As for PartyGaming and Bwin, the speculation as to their appetite for a merger will no doubt remain at the forefront of industry gossip until any formal announcements are made, awaiting further developments with great interest. As PartyGaming and Bwin have a significant presence in Germany, one can be certain that the ECJ rulings referred to above, expected later this year, would have a bearing on any deal talks were they to take place.
Robert Willis
Associate
Olswang LLP
This article was first published in the 4 April 2010 edition of World Online Gambling Law Report.
