It looks like your browser is not up to date.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us
  • A A A
  • UK bookmakers: hurdles and handicaps

    We’re only half way through 2018, but it’s already been a rough ride for the UK’s bookmakers. Here, I run the rule over the sector’s runner and riders.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    We're only half way through 2018, but it’s already been a rough ride for the UK’s bookmakers. Here, I run the rule over the sector's runner and riders.

    We've written this article for your interest, but it's not a guide for how you should invest. You should consider your own aims and attitude to risk before making any investment decisions. If you’re not sure about your investment decisions, you should seek advice.

    Remember all investments and income can fall as well as rise in value and you could get back less than you invest.

    The changes – bookmakers win some, lose some

    The dangers of fixed-odds betting terminals (FOBT) has been a big story over the last 12 months. Tales of woe arising from the machines, which allow punters to stake hundreds of pounds a minute, put the pressure on the government to tighten up regulation.

    As can often be the way, a lengthy consultation period meant change wasn’t quick. The bookies stressed that jobs were on the line if new rules were too severe, but societal pressures meant a cut of some sort was always the odds-on favourite. In the end, the government reduced the maximum stake to just £2 per spin.

    Each of the main players have since outlined the impact on their businesses. The effects were wide-ranging.

    Paddy Power Betfair, which only has a small number of UK stores, said revenues would dip 2-2.6%. GVC, mostly as a result of its purchase of Ladbrokes Coral, anticipates a near-term £160m hit to EBITDA - around 20% of 2018 profits. William Hill is the most affected, and expects operating profit to drop by around a third.

    As you’d expect, FOBT regulations have weighed on share prices. But, soon after the news, shares across the sector bounced.

    US regulation - a $150bn opportunity

    Around the same time the clock was ticking down on the FOBTs, rumours the US would be clearing the way for a more liberal stance on sports betting were starting to gather steam.

    Those rumours turning to reality were the driving force behind a 5-10% jump on 14 May. That was the day the US Supreme court paved the way across America to repeal a law that outlawed sports betting in most states.

    Around $150bn changes hands on the underground market in the US every year, so there’s clearly a huge opportunity ahead.

    The question is, are any of the UK names ready to capitalise?

    Paddy Power Betfair

    Paddy Power Betfair has swiftly adopted a ‘speculate to accumulate’ strategy. The ink was barely dry on the Supreme Court’s legislation when the group confirmed its merger with FanDuel, a leading fantasy sports site. That’s fantasy as in fantasy football leagues, rather than fantasy as in dungeons and dragons.

    Paddy Power Betfair already has operations in the US (remember sports betting isn’t illegal in all states). But, building a strong nationwide position organically could take time. That makes us think using mergers and acquisitions (M&A) to get a foothold in this potentially exciting new market is sensible.

    The move doesn’t stretch the balance sheet either. Even after shelling out $158m on the deal, it’ll keep a sizeable cash pile.

    The group’s low exposure to the UK high street, strong balance sheet and the potential for a headstart in the US mean the shares trade on a price to earnings ratio of 19.7, the highest of the major players. That means the group is well-placed, but will be assessed against a higher bar than its UK rivals.

    See our Paddy Power Betfair factsheet for share prices and charts

    GVC

    Deals are also a central theme at GVC.

    Over the years it’s played the role of serial accumulator, having successfully increased organic growth with bolt-on deals.

    Investors would be forgiven for thinking its most recent deal, which brought the retail-heavy Ladbrokes Coral business into the group was a bit short-sighted. After all, it looks like it will take a hit from the FOBT changes.

    But GVC was actually one step ahead. It structured the deal in such a way that the lower the FOBT restriction, the lower the takeover price. That’s turned out to be a smart hedge.

    Despite the likely disruption from the tougher FOBT rules, GVC recently confirmed it still thinks combining the businesses will benefit the bottom line. In fact, the £130m of savings it now expects is higher than the £100m originally targeted.

    Ladbrokes Coral also came with a leading provider of sports betting technology in the US. This, plus GVC’s existing tie-up with MGM casinos, means there’s potential to for it to power any MGM roll-out as and when more states come online.

    We think GVC’s behind the scenes technology could be an important differentiator. While others rely on third parties to run games, GVC has its own platform. Experience in both the business-to-business and consumer-facing markets could prove vital in attracting move partners.

    As ever with GVC, more acquisitions can’t be ruled out. Even though Ladbrokes Coral is being digested, Kenneth Alexander has indicated there’s an appetite for more deals. While there’s plenty of potential, as we discuss below, deals in new territories bring extra risk.

    See our GVC factsheet for share prices, charts and research

    William Hill

    While GVC provides the behind-the-scenes technology, William Hill might take a more visible approach. The group already runs sports betting outlets in Nevada, which operate in casinos under the familiar blue, white and yellow.

    Business-to-business sales can deliver attractive returns, but a strong, durable brand with consumers is the real jackpot. That’s what William Hill is gunning for in the US.

    Even a small slice of the potential market would move the dial a lot, and expansion in other states is possible.

    The saying might go that the bookies always win, but as far as conquering America goes, clearly not everyone will. America represents a new challenge, and the potentially higher rewards come with extra risks.

    A flick through the history books shows us overseas expansion isn’t a golden ticket to riches. Not so long ago the group was taking ambitious steps to expand in Australia, which is one of the most fertile gambling territories on earth. But the group endured a difficult time down under and ended up selling the business for a significant loss.

    CEO Philip Bowcock has said it’s unlikely we’ll know much about how the US market evolves and how William Hill performs for a few years yet. That puts the focus back on the UK for now.

    It’s encouraging to see online betting has picked up recently. Investors will be hoping this trend carries on through this summer’s World Cup.

    But tighter FOBT regulations will limit growth in the coming years, leaving the shares trading on 12 times expected earnings, below their rivals in the sector. The prospective dividend yield is 4.4%, variable, not guaranteed and not a reliable indicator of future income.

    See our William Hill factsheet for share prices, charts and research

    Unless otherwise stated estimates are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

    This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

    neith

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    Editor's choice – our weekly email

    Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:

    • Latest comment on economies and markets
    • Expert investment research
    • Financial planning tips
    Sign up

    Related articles

    Category: Shares

    Next week on the stock market

    We take a look at what to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

    Sophie Lund-Yates

    10 Jun 2021 0 min read

    Category: Shares

    Next week on the stock market

    We take a look at what to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

    Nicholas Hyett, Equity Analyst

    04 Jun 2021 4 min read

    Category: Shares

    Next week on the stock market

    We take a look at what to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

    Sophie Lund-Yates

    27 May 2021 4 min read

    Category: Shares

    Next week on the stock market

    We take a look at what to expect from a selection of FTSE 100, FTSE 250 and selected other companies reporting next week.

    Sophie Lund-Yates

    20 May 2021 5 min read