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We look at the opportunities for 888, Flutter Entertainment, GVC and William Hill
Thursday 25 Jul 2019 Author: Martin Gamble

Can it be third time lucky for UK betting companies with their efforts to crack the US market?

The online market was effectively shut down in 2006, only for it to reopen in 2013 as individual states realised they could make a lot of tax from having regulated, legal online gambling activities.

After initial fanfare, the online market didn’t prove to be that big a success for UK companies. Hopes were raised once again in 2018 when the US market signalled the opening up of the sports betting industry. That provided a short-lived tailwind for UK gambling stocks, but progress has been slower than hoped.

We’re now at the next phase where progress is finally being made and it seems like the US could be the much-needed growth driver for UK companies. The sector looks cheap compared to historical ratings, so now could be time to buy select stocks. Our top picks are 888 (888) and Flutter Entertainment (FLTR).


The global gambling market generated around £347bn in gross revenues in 2018 according to consultancy H2 Gaming Capital. The UK has the largest online penetration at 37%, representing around £6bn.

However, the future of gambling is inextricably linked to the opening up of the US market. Betting firm GVC (GVC) even goes as far as saying the US is the largest sports betting opportunity to emerge in the past 20 years.

To give some idea of the scale of the opportunity, Americans watch 2.2trn minutes of sports every year, which is covered by 37 networks, airing 11,000 sports events, according to betting firm William Hill (WMH).

Gambling Compliance, a company which provides business intelligence to the industry, estimates there will be 34 states with legal gaming markets by 2024, generating $5.7bn of revenue.

It projects the US to become the second-largest regulated gaming market in the world – behind only China – even without California, Texas and Florida, which combine for 27% of the US population, joining the marketplace.

The regulations are expected to vary from state to state and will depend on whether operations are land-based, tethered mobile (mobile accounts must first be opened in a casino) or fully mobile.

Dermot Smurfit, chief executive of software-as-a-service (SaaS) company GAN (GAN:AIM), tells Shares: ‘The American market is clearly regulating internet gambling on a state-by-state basis, and regulating fast, with legislative momentum accelerating in the first half of 2019 to encompass 21% of all Americans, up from 10% at the end of 2018.

‘This year alone internet gambling has been regulated in seven new US states and industry analysts believe more than half of all Americans will be permitted to gamble online as a result of accelerating regulation within just a few more years,’ he adds.


Some of the UK operators believe the key to success will be gaining access to the market through relationships with land-based casinos, who are generally the licence holders.

For example, William Hill has a joint venture with US-based Eldorado which owns a 20% stake, and together they are one of the largest US players through a Nevada business that generates around $50m of earnings before interest, depreciation and amortisation (EBITDA).

Eldorado is currently in the process of merging with Caesars Entertainment, a deal which would have a major benefit to William Hill as the scale of the enlarged business would be material, with 60 casinos across 16 states.

William Hill is entitled to operate mobile sports in states where Eldorado obtains a licence, as well as to exclusively operate sports books in the acquired casinos.

However, a note of caution comes from gambling industry expert Regulus Partners, which says that UK companies may be making too much of the ‘access’ card. There are more than 1,000 land-based casinos in the US, so access shouldn’t be an issue for UK companies.

However, as Smurfit at GAN says, there is an important dynamic at play which could create big upside for the land-based casinos. Almost a third of sports bettors subsequently go on to make a casino bet, bringing incremental business. Casinos are therefore more likely to collaborate.


The four largest UK gambling companies have on average fallen 40% from their 52 week highs in May 2018. Poor performance can be placed at the door of stricter legislation and increasing taxation which has hit profits and nullified the growth of online.

In addition, politicians have moved to put in place greater protections for ‘vulnerable’ customers, making it slower and more expensive to acquire new customers.

These pressures have prompted the recent consolidation seen in the sector such as GVC buying Ladbrokes/Coral and Paddy Power buying Betfair. The clampdown on fixed odds betting terminals reducing the maximum bet from £100 to £2 is forcing William Hill and GVC to shutter stores to reduce costs.

In 2016 the UK introduced a point of consumption tax (POC) in order to capture the sales value of offshore companies operating out of tax havens and selling into the UK. Under the new rules, gambling companies pay 15% of all revenues generated from UK customers, irrespective of where they are registered. From 2020 the POC tax will increase to 20%.

The regulator has become more proactive in taking actions against companies who fall foul of the stricter rules. For example, the Gambling Commission recently reported that nearly £14m of penalties will be paid by three companies for failing to put in place effective measures to prevent money laundering and keep customers safe.

Until recently online gambling companies had 72 hours to carry out age related checks and were not allowed to pay out winnings until age verification had been completed. Since February this year, new rules came into effect which means companies are not permitted to take deposits until verification has been done, including free bets.

The regulator is also considering extending the rule to free-to-play games as there isn’t a reason why they should be available to children.


Nearly 60% of football clubs in the top two divisions are sponsored by gambling companies, with the Championship boasting 70%. It’s got to the point where betting on a football match while watching seems almost normal.

Media pressure highlighting the dangers of promoting a gambling culture is having an impact on the commercial side of the business. GVC and William Hill are considering stopping perimeter advertising, and GVC wants to go further and stop advertising in sport altogether.

Ignoring the moral considerations just for a moment, there is an argument that even if sponsorship was banned it would have little impact on consumer behaviour. Look no further than the US Superbowl 2018 where an estimated $4.5bn worth of bets were placed despite the fact that 97% of bets were illegal at the time and there weren’t any gambling adverts.

Whatever happens in the future, the direction of travel is clearly for more regulation and if the industry wants to prove its credentials for ‘self-regulation’, it will need to spend more money financing initiatives designed to protect the consumer of its products.


These developments beg the question, what have share prices already discounted and are they too pessimistic about the US market?

The four largest companies in the sector have an average dividend yield of 5.5% and trade on an average price-to-earnings ratio of 13.8-times. Historically these metrics are at the cheaper end of the spectrum and suggest that investors are sceptical of future growth.

There will no doubt be winners and losers emerging from the shift to online and the opening up of the US market. Read on to see how the runners and riders stack up.


Founded in 1997, 888 is a pure online company focused on providing mass-market casino and sports games direct to the consumer. Its ambition is to become the dominant casino player and top tier sports operator, by scaling up its proprietary technology platform.

The company runs a white label technology platform for the business-to-business sector through its ownership of Dragonfish, although this is now only a small part of its business.

The company’s technology platform is a key differentiator and provides it with speed and flexibility to enter new markets and add new features. Its games generate 1.46 times more bets per play than third party equivalents.

Customer acquisition costs have fallen by 13% since the first quarter of 2017 and 8% since the first quarter of 2018. The transformation in 888’s business is starting to pay off with increasing like-for-like growth of 45% in casino revenue year-to-date according to JP Morgan analyst Ted Nyhan.

888 has been present in the US since 2013 and it runs a tri-state poker network to pool players across currently regulated states. The network has launched a host of tournaments and prizes, including a guaranteed weekly $100,000 Sunday tournament.

The company also runs the Delaware state lottery on a contract which runs for another two years.

Adjusted pre-tax profit is forecast to be $65m in 2019 (2018: $87m) before progressing to $73m in 2020 and $87m in 2021.

‘888 was among the first operators to realign its business to become fully compliant with tightening compliance regulations,’ says research group Edison. ‘This has been particularly evident in the fact that first quarter 2019 UK revenues have seen a significant uptick, while other operators continue to show declines.’

We have a ‘buy’ rating on 888 and believe the market has yet to fully recognise the significant changes to the way it does business.


GVC was founded in 2004 as an e-gaming operator and has since grown rapidly through acquisition. In 2016 it bought the Austrian gaming company for €1.5bn and in 2018 it purchased Ladbrokes for £3.1bn.

Generating $3.5bn of net gaming revenues, GVC is the largest UK quoted gambling company.

In the US GVC operates a 50:50 joint venture with MGM called Roar Digital, created to capitalise on the market opportunities. Management believes the size of the US market could be worth $6bn to $10bn in the medium term.

GVC hopes to capture around 20% of the market through its joint venture and leading brands, and to generate 30% margins at the earnings before interest, tax, depreciation and amortisation (EBITDA) level.

The legacy retail shops, which represent around 37% of revenues, have been a drag on performance but in May management suggested that they expect Ladbrokes to be GVC’s best performing brand over the next two years and that the transition to the GVC platform was now largely complete.

The company has made a ‘step-change’ in its practices to accommodate all the regulatory changes. It expects UK online to grow at a high single digit over the coming years.

GVC has been at the forefront of taking preventative actions including calling for a ban on UK TV sports betting adverts and an increased funding for research and education.

The company has guided towards long-term double-digit growth in online revenue and an EBITDA margin of 30%, while reaffirming that annual dividends will grow at least double-digit. In terms of the US, it expects that over time, the top three operators will achieve a combined 60% market share. Its joint venture is targeting the number one position.

We don’t believe the shares are worth buying at present as the company continues to face criticism of poor corporate governance. This negative market sentiment could weigh on the share price until GVC can prove its standards have improved. Avoid for now, but keep a close eye as the business does have opportunities to grow.

William Hill

Founded in 1934 as a postal and telephone betting service, William Hill entered the retail betting business in 1966. The bulk of its business today is conducted in the UK where it operates from around 2,300 shops. Online accounts for 39% of revenues.

The recent acquisition of Mr Green for £242m significantly increased its European footprint.

The company has operated in the US since 2012 and is a leading US sports operator. It reckons that its potential revenues from the first 17 US states to open up will be worth between $2.5bn and $4.9bn by 2023.

As well as Eldorado’s $50m shareholding in the William Hill plc business it also has a 20% stake in William Hill US. The companies will share profits and capital expenditures 50:50 over an initial 25-year term.

Since the rules on US sports betting changed last year, the company has taken around $200m of sport wagers from states outside Nevada, demonstrating its potential to grow quickly. Its existing presence will also lower potential marketing costs, helping to achieve profitability sooner.

We’re concerned about the challenges facing its UK business and the fact the business no longer has the scale it previously enjoyed. It continues to be seen as a takeover target, but that is no reason to buy the shares. Avoid.

Flutter Entertainment

Formerly called Paddy Power Betfair following the 2016 merger, Flutter Entertainment operates a dual brand strategy, with the Betfair brand positioned to attract more value conscious players and the Paddy Power brand positioned to attract more casual players.

Roughly half of revenues are generated from online, with retail shops representing 18%, the US 10% and the rest from Australia. The company has recently acquired licences in the US, Spain and Georgia.

Flutter has been in the US market since 2009 and expanded through the acquisition of two fantasy sports businesses, FanDuel and Draft, making Flutter the largest US operator.

The FanDuel business is comprised of four revenue streams: horse racing, fantasy sports, sports betting and the Betfair online casino, which in aggregate made $313m of revenues in 2018.

While the Betfair casino and sports betting businesses are only present in three states, New Jersey, Pennsylvania and West Virginia, horse racing operates across 33 states and fantasy sports across 41 states. FanDuel is the largest online sports gaming company is the US.

As to the potential market opportunity, the company cites the American Gaming Association which estimates the total size of illegal sports betting as north of $150bn annually, equivalent to around $10bn of gross gaming revenues.

New Jersey is already an attractive online market with $122m of revenues seen in the first few months. Industry analysts believe the market size will eventually reach between $500m to $600m of gross gaming revenues.

Flutter estimates that even applying a modest legalisation assumption of around 25% of the US population, a FanDuel profit contribution could match the current European online business. 

Edison says Flutter’s scale and technology provide significant revenue and cost advantages versus some peers.

We believe the shares are worth buying given its strong position in the US and differentiated offering.

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