The UK: no longer open for business

24 April 2019

The populist policymaking of the past couple of years is leading many in the gambling industry to rethink their UK strategy, says Julian Buhagiar, co-founder of RB Capital.

The UK’s reputation as a civil and friendly place to do business is clearly no longer what it once was. The current raft of reactionary legislation going through parliament is set to affect several industries for many years to come – none more so than the gambling industry. 

While Brexit has long been an excuse as to why UK law and policymakers are in such a mess, it is unjustifiable and reductionist to blame this singular reason for the current economic malaise we are experiencing.

This decade will go down as one where various conflicting external pressures have forced UK policymakers into a legislative dead-end, with both populist and lobbying measures taking over pragmatic decision-making.

This has enabled knee-jerk reactions to hold sway over what should be broader, longer-term strategic thinking, and it is highly likely the country will be all the worse for it as there seems to be no change in sight.

The UK gambling market exemplifies this more than many. Having recently been dealt a double whammy by the government with first the enactment of FOBT staking limits ahead of schedule, then the increase in taxation to 21%, the market also faces a period of limbo with the lack of clarity on cross-border transactions post Brexit.

This is impacting short-term revenues on UK firms’ operations in the eurozone, and more pertinently, leading to the relative weakness of the pound in overseas markets.

Mass exodus from the UK ahead?
Add to that a clampdown on advertising, rising levels of compliance and the resources needed to manage more red tape, skyrocketing CPAs and increased competition and 188 Bet’s recent exit announcement is likely to be only the first story about a company being forced to throw in the towel.

This macro-economic upheaval is also set to have a profound effect on UK-centric acquisitions. Previously thriving organisations that were able to benefit from ‘business-friendly’ lighter regulation are now rethinking their medium-term UK strategy.

A mass exodus of gambling brands that no longer wish to operate under such a punitive environment is certainly not outside the realm of possibility, and as a consequence, we are likely to see a short-term flash of M&A deals over the next 18 months as companies capitalise on existing brand momentum to maximise deal values.

So where will the interested parties emerge from in such an uncertain environment? Predominantly from outside British shores, and, if current predictions are correct, from the US especially. We’ve seen a significant amount of interest surface around publicly listed gaming companies that have little to no US revenue reporting.

The reason for this is that a significant proportion of FTSE-based companies state their earnings in US dollars, so when sterling depreciates for the reasons outlined above, companies increase in (apparent) dollar value due to the currency’s increasing strength – making the balance sheet look far more attractive than it should.

While the specific asset of interest would vary, we are seeing a significant number of post product and post revenue gaming providers with their own remote gaming servers already in advanced discussions with several key US players.

Investors’ wishlist
An IP-based acquisition (i.e., one where the assets in question own intellectual property such as content, licences, patented technology, etc.) is in line with what many VCs are already looking at outside of gaming circles; whereby the more product-based investments are made compared with investments in service-based verticals, the higher the value of a tech fund.

This is especially the case where such gaming platforms either already (or have the potential to) offer fantasy and/or esports-based product verticals that US players are amenable to – and that will be able to immediately generate revenue as soon as they are acquired.

Additionally, there is likely to be strong demand for small-to-medium private operators with existing UK (and even EU) territorial licences and largely ‘clean’ player databases. Newer VC and PE tech funds will inevitably recognise that there is an active need to invest in operations with sustainable player lifetime values across markets.

Previous funds have enjoyed significant returns across player-centric verticals (such as music and fintech) where current profitability is less important than the possibility of sustainable revenue growth powered by an existing customer base.

On paper, this increased desire to invest in the UK may look like a reflection of a booming economy, but it’s arguably the complete opposite. Instead, the continued punitive legislation we are seeing – especially that which is currently being directed towards the gambling industry – is one of continued negativity.

With greater uncertainty comes a cheaper company valuation and a greater desire to sell, and until this current tempestuous environment of knee-jerk, populist policymaking subsides, we can expect to see far more business owners willing to exit the market while others are left to ride out the current storm.

So, where will the foreign money flow to? From a venture capitalist’s perspective, that is relatively easy. Any newly regulated territories supporting thriving IP-based growth and understanding the need for light-touch regulation will be of interest to growth and technology funds.

Portugal, Austria and more recently, though for different reasons, Malta have all enjoyed cautious foreign direct investment growth that is underpinned by growing tech assets with strong IP to boost longer-term valuations.

In the medium term, we have yet to see the widespread rise of gambling-specific funds (not least because of the associated social stigma) but the reality is that Nordic funds have been making these investments for several years; witness the growth of Nasdaq Nordic stock for well-known public companies in gaming and affiliate marketing.

However, investor interest is gradually drifting away from these territories and venturing further south towards new, less leveraged assets that promise investors higher returns on equity. Expect to see more gaming-centric funds in central and southern Europe in the next 18 months.

An interesting dynamic is developing in the short term. The UK’s current legislative woes will see an increased amount of M&A in the coming months, while smarter investment capital looks further to lighter-touch regulated territories with the promise of better valued tech assets.

Julian Buhagiar of RB Capital is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has led investments, M&As and exits to date in excess of $370m.