Three key factors look set to dominate the UK gambling sector in the coming years: big global dealmaking; a continued shift towards online gaming and an increased  regulatory burden.

In this feature we take a closer look at the individual stocks in this space and highlight potential winners and losers.

We will focus in particular on Flutter Entertainment (FLTR), Entain (ENT), 888 Holdings (888) and Rank Group (RNK).

We shall discuss these factors shortly, but for the uninitiated we provide a brief description of the main players. After all, there have been several mergers and name changes in recent years.

THE RUNNERS AND RIDERS

The largest player by market cap and sales is Flutter Entertainment.

The firm generated around £6 billion of sales in 2021 and operates in more than 100 markets. The company changed its name following the merger of Betfair and Paddy Power.

It is organized across four divisions with UK and Ireland the largest representing around a third of revenues.

Brands include Skybetting and Tombola in the UK. Key US brands include FanDuel, Foxbet, and PokerStars. The company owns the leading online sports betting brand in Australia – Sportsbet.

Entain was formerly known as GVC and changed its name in December 2020. It generated almost £4 billion of revenues in 2021.

Entain owns the iconic Ladbrokes, Coral, Gala and Foxy Bingo brands in the UK. It is the leading UK high street bookmaker with more than 2,500 shops.

In the US the company operates through a 50/50 joint venture with MGM Resorts (MGM:NASDAQ) called BetMGM. Other owned brands include Sportingbet, Bwin, partypoker and Party Casino.

Rank Group is the largest casino operator in the UK by number of venues and the second largest bingo operator through its Mecca brand with a national network of 72 venues.

Rank is the fourth largest bingo operator in Spain by number of venues. The company also operates several digital-only brands.

888 Holdings is a global online gaming and sports betting company operating in more than 100 markets. The company claims 888casino is the only globally recognized casino brand.

The company entered the US market in 2011 through an agreement with Caesars Interactive Entertainment. 888 also has a strategic partnership with iconic US brand Sports Illustrated.

In 2021 888 acquired the European assets of William Hill which will significantly increase the size and scale of the company. The combined group will hold top three positions in the UK and Spain.

US LAND GRAB

In 2018 the US re-opened its gambling markets by repealing the 1992 Professional and Amateur Sports Protection Act (PASPA), effectively creating a significant land grab opportunity.

Analysts have estimated the size of this opportunity to be ultimately worth between $30-and-$35 billion a year in gaming revenues.

Under US state laws, overseas firms wanting access are required to partner with US companies which hold a limited number of licenses.

Flutter owns leading US fantasy sports company FanDuel while Entain operates through a 50/50 joint venture with MGM Resorts International.

Flutter and Entain claim to be market leaders and generated $1.9 billion and $850 million of US revenues respectively in 2021. Both are expected to turn a profit across the Atlantic in 2023.

US FIRMS TRY TO TAKE CONTROL

US firms seem intent on buying out their UK partners just as the economics and scale of the US operations get more interesting and start generating profit.

MGM Resorts tried to buy Entain in January 2021 for $11 billion (£8 billion) which Entain’s board promptly rejected.

A few months later, FanDuel’s main US rival Draftkings (DKNG:NASDAQ) made an audacious £16.4 billion offer for Entain but later walked away.

One key factor behind the bid’s failure was the possibility of BetMGM taking full control of the joint venture in the event of a hostile takeover.

The only casualty so far has been William Hill which succumbed to a £2.9 billion takeover from Caesars Entertainment (CZR:NASDAQ) in April 2021. Shares in Caesars have roughly halved since the acquisition.

Caesars and William Hill had operated a 20/80 joint venture before the agreed deal. The US firm argued the JV needed to be ‘broadened in scope’ to fully maximise the US opportunity.

Caesars operates through 54 properties in 16 states under the Caesars, Harrah’s, Horseshoe and Eldorado brand names.

In September 2021 William Hill’s ex-US operations including 1,400 UK betting shops were sold to 888 Holdings for £2.2 billion.

888 was predominantly an online casino operator before the deal and the acquisition will transform the business.

Management expect the addition of William Hill will enhance adjusted earnings per share by more than 50% in the first full year of ownership.

TIGHTER REGULATION THREAT

The Government is reviewing current gambling legislation after criticism there aren’t enough controls to protect vulnerable customers.

The rapid growth of online gambling has opened the market up to a broader but less experienced audience.

A Public Health England study in September 2021 found an estimated 409 suicides were linked to gambling across the country every year.

There have been reports suggesting the Government is considering reducing online casino stakes to as little as £2.

Affordability checks would be introduced to protect the most vulnerable.

The proliferation of football clubs striking lucrative sponsorship deals with betting firms has resulted in nearly half of the Premier League teams having a betting firm as sponsor.

The Government is hoping to convince football clubs to replace the gambling firms or ban the practice altogether.

However, it isn’t straightforward as smaller football clubs rely on lucrative sponsorship deals to survive, so they may resist.

In the top-flight West Ham receives one of the most lucrative deals according to BBC sport, taking in £10 million a season from sponsor Betway.

MOST AND LEAST AT RISK

Online betting company 888 Holdings looks most at risk from the review given it generates around 42% of its revenue from the UK market. But arguably the shares already reflect a lot of bad news.

According to investment bank Berenberg the shares are discounting a worse-case scenario of around a 30% hit to 2022 EBITDA (earnings before interest, taxes, depreciation, and amortisation). This looks excessive relative to Berenberg’s forecast of a 15% impact.

At the other end of the spectrum casino and bingo operator Rank Group could be a beneficiary from regulatory changes.

In a research note Numis argues the company could benefit from the gambling review if the government harmonises casino licences between online and shops allowing more machines to be installed.

The gambling firms haven’t been idly sitting on their hands waiting for the laws to change and have spent millions of pounds developing ways to address regulatory issues.

For example, Entain has developed an artificial intelligence product which runs in the background and detects vulnerable behaviour. Initial trials have shown encouraging results with an overall 30% reduction in customers increasing their risk levels.

Regulatory costs have become a bigger feature of the landscape and this is another key driver of increasing consolidation.

OUR TOP PICK

We believe Entain is the most attractive company in the sector due to its strong technology platform and leading US presence. We also like its ambitious growth strategy and vision.

Entain has a differentiated offering and unique view of how the industry might develop in the future.

Chief executive Jette Hygaard-Andersen believes the interactive entertainment and media industries are converging with the betting and gaming industries.

This backdrop will provide meaningful growth opportunities and the company estimates its total addressable market is three times as big as the current business.

Investors looking for diversified exposure have limited options as there are few funds which are dedicated to the sector. One possibility is the recently launched Fischer Sports Betting and iGaming (BETP), issued by HanETF.

The sterling-denominated exchange-traded fund has an ongoing charge of 0.69% and tracks the big UK players like Entain and Flutter along with overseas firms like DraftKings and Swedish online casino tech firm Evolution AB (EVO:STO).

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