William Hill’s gamble may pay off

William Hill’s bold approach for Sportingbet may have been rejected on Monday but the move, which would bring with it Sportingbet’s businesses in Australia and Spain, has won plaudits in a market where regulation remains a formidable barrier to expansion.

The UK betting group has enlisted smaller rival GVC to help it acquire Sportingbet – a business that operates in both the regulated and so-called “grey” unregulated markets.

Their joint approach involved William Hill acquiring Sportingbet’s regulated assets, with GVC taking on the unregulated operations.

Sportingbet says their indicative offer of 52.5p, valuing the company at £350.2m, “significantly undervalues the business and its future prospects”. But analysts expect the duo to return with a bigger offer, such is the importance of the operator’s regulated assets to William Hill.

By making a joint offer with GVC, William Hill had hoped to negotiate the regulatory problems that led to Ladbrokes last year abandoning talks to buy Sportingbet.

“Ninety-two per cent of our turnover is from the UK so we’re absolutely looking at expanding internationally, but only in regulated markets,” explains Lyndsay Wright, William Hill’s head of investor relations.

Europe remains the biggest regional online gambling market globally, worth about €9bn in revenues, according to H2 Gaming Capital, a gambling consultancy. That is expected to rise by about €3bn over the next three years. But regulatory risks have stalled overseas moves by London-listed companies – as has the burden of new taxes in countries opening up their gambling markets.

“In the last two to three years, we’ve seen markets like France, Spain and Germany moving towards greater clarity in their online gambling laws and we are seeing a recent shift towards regulated markets expansion,” says James Ainley, an analyst at Citi.

“But also there’s recognition among operators that the market doesn’t pay a lot for unregulated earnings.”

William Hill Online (WHO), the joint venture business of William Hill and Playtech, derives about a fifth of its revenues from customers in unregulated markets, such as Greece, using its parent website in Gibraltar. The business operates on the principle that it is up to online punters to ensure they comply with local laws.

“For us, it’s a black and white issue: if it’s explicitly illegal to take online bets, such as in Turkey, we won’t advertise there and we won’t have local websites,” says Ms Wright.

Sportingbet has also been seeking a higher proportion of regulated revenues. Last October, the company agreed to sell its lucrative unregulated Turkey business to GVC for €142.5m.

“We used to operate a scattergun approach where we would operate in a country until the regulatory picture became clearer – so we withdrew from France and Turkey and got licences in Australia and Spain,” said Andy McIver, chief executive of Sportingbet. “Our goal is to be as regulated as possible and it was just a case of when we reached that tipping point.”

But for those who play according to the rule book of governments, the costs can be high. In June, the German government surprised many gambling operators – such as Bwin Party, Betfair and Bet 365 – by announcing a 5 per cent tax on sports betting revenues.

These companies, which had been waiting for the government to decide its policy on online gambling, argue that the turnover tax will make their business models unprofitable. As a result, some analysts have speculated that Betfair and Bwin Party might pull out of the country. They cite the example of France, which introduced a turnover tax in 2010. Ladbrokes, Sportingbet and Paddy Power subsequently left the French market.

“What has happened in Germany is an example of why the [online gambling] sector’s share price volatility is driven by what happens in terms of regulation,” says Martin Cruddace, Betfair’s chief legal officer.

In May, as Spain’s cash-strapped government prepared to hand out sports betting licences, companies including Bwin, Sportingbet, Betfair and William Hill had multimillion-euro tax charges levied upon them. It followed an attempt last year by Greece to launch a retrospective tax on online gambling companies that had Greek customers.

“Nobody foresaw retrospective taxes being applied in Spain – it was based on an obscure law that [the former Spanish dictator] General Franco introduced,” says Clive Hawkswood, chief executive of the Remote Gambling Association.

Madrid also told Betfair it would have to buy an additional licence for its betting exchange which facilitates gamblers’ bets with one another through an online marketplace, instead of offering fixed-odds bets itself.

Betfair says a regulatory buffeting can be inevitable when travelling to the continent. “If getting into the market legally with a different product is the only way that’s what we have to do,” says Mr Cruddace. “But there is turbulence.”