"You got to know when to hold 'em, know when to fold 'em," advised country singer Kenny Rogers in his salutary ditty "The Gambler." But sometimes, as Rogers did not croon, you need to know when to go all in.
Europe's No. 1 and No. 2 online gambling houses, Austria's Bwin Interactive Entertainment AG and PartyGaming plc of Gibraltar, appear to be edging closer to doing just that after confirming in late January that they are talking. Investors applauded the news, bidding up shares in both companies. But talk of the possible union -- and word that other industry players are considering joining forces -- begs an interesting question: Why hasn't the long-anticipated industry consolidation of the European online gaming market already happened? By any measure, it's extremely fragmented: Industry leader Bwin claims just 8% of the European market, and PartyGaming has a little less than 6.5%, according to Barclays Capital.
Analysts are confident that a Bwin-PartyGaming union, which would bring together the largest online sports gambling firm in Bwin and the largest online casino operator, has a good chance of turning the tide.
Continue reading below
"We estimate cost savings of roughly 20% to 30% of combined Ebitda [$65 million to $113 million] from a Party/BWIN merger," says brokers at Numis Securities Ltd. "Revenue benefits are also potentially substantial from increased liquidity and cross-selling." Savings will come from combining IT spend, effectively halving the cost of platform development and maintenance, and from reduced marketing expenditures.
The problem is pricing or, more precisely, pricing in an uncertain regulatory environment. The issue has put the brakes on earlier efforts at industry consolidation and could yet stall a Bwin-PartyGaming deal.
The rules governing Europe's roughly $8.5 billion online gambling industry, the world's biggest, are a mess and appear to be getting messier.
Consider the case of France. where French law bans the provision of online gambling services by foreign companies. Yet the French are free, if not strictly allowed, to use these services and have done so in large numbers. The upshot is that many of the providers make significant revenues in France, albeit on the fringes of legality.
Putting a value on "gray income," as an executive at one gambling firm politely describes such sales, is inherently difficult. And it is further complicated by the risk that the income could, in the near future, be lost. French lawmakers at the start of January debated new rules that would allow them to block overseas gambling Web sites and fine search engines as much as €100,000 ($139,000) if they facilitated access to the sites.
"How do you explain publicly that you have a 20% market share in France and that you could lose that?" says Scott Longley of London-based research firm Gambling Compliance Ltd.
The French example is replicated across Europe. Belgium in December passed a law limiting online gaming operations to companies with a physical presence in the country and promised to block foreign operators. Portugal in September won a European Court of Justice case against Bwin, which appears to empower European Union member nations to unilaterally block all online gambling activity, including advertising, of gaming sites within its borders.
The ruling seems to violate the spirit, and possibly the letter, of European competition law. No matter, said the ECJ in a statement accompanying its ruling. The court wrote that "the prohibition imposed on operators ... of offering games of chance via the internet may be regarded as justified by the objective of combating fraud and crime."
All of that might suggest that this is a bad time to be considering a deal. But potential dealmakers present three strong counterarguments.
First, they say, timing is never perfect. Regulations will continue to evolve, and savings not realized are lost forever.
Second, not all new regulation is moving against the online companies. Even as some governments arm themselves to block foreign operators, others are also preparing to issue licenses to providers. France, for example, is doing both.
This move to licensing will not only remove the "gray" from income streams but will allow licensed operators to more aggressively market themselves. Experience from the Italian market, which went down this route in 2007, is that licensed markets grow rapidly, opening a brief window in which new customers are up for grabs.
Finally, doing a deal increasingly appears less risky than being left on the sidelines. The combination of any two or three major players would create a dominant player where currently there is none. A combined Bwin-PartyGaming operation would be almost 3 times larger than the next closest rival, William Hill plc, which has about a 4.5% market share.
"Take your pick from any of the top five or six players -- they are all talking to each other," says Gambling Compliance's Longley. "I would be very surprised if they were still separate by the end of the year."
