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The online gambling industry has probably been in the shadows for too long in recent quarters. Despite strong results in H1 2019, shares have faced poor price action, overshadowed by headlines about taxes and tightening regulations around the world. Yet the wave of legalization of sports betting in the US following the removal of the Professional and Amateur Sports Protection Act by the Supreme Court in May 2018 as well as the acceleration of large M&A operations in the sector are expected to provide a solid start through 2020 as the center of attention turns west.
The structural challenges faced in disruptive markets such as the United Kingdom, where rising costs due to tightening regulation relating to customer due diligence as well as online gambling taxes, or price competition in Asian countries should drive M&A activities to most profitable activities as is sports betting in the US. Of five states legalizing sports betting in 2018, 14 others are following the trend in 2019, while projections indicate an 80% rate over the next five years. It is interesting to note that the state of New Jersey, since the official legalization of sports betting in June 2018, has been in close competition with the state of Nevada, which legalized it in 1992, suggesting a great potential for revenue appreciation in the field of online sports betting in the North American region. The announcement of the merger of Flutter Entertainment (formerly Paddy Power Betfair) - The Stars Group on 2 October 2019, which would form the largest online gambling operator (worth approximately GBP 10.5 billion), expected to be completed by the third quarter of 2020, is a typical example of where online gambling leaders are ready to move towards. From mature, cash-cow poker-like businesses that should stay solid customer acquisition platforms, typically defining The Stars Group business model, larger players should diversify their activities, as would a merger with Flutter, by reducing the risk of revenue concentration, increasing synergies and cross-selling opportunities while focusing on key strategic drivers such as US sports betting offers for example. In this context, the newly formed group should be well positioned to support organic growth looking forward as Flutter’s ownership in FOX Bet and FanDuel, two leading companies in the US sports betting sector, would provide solid fundamentals amid NFL 2019 – 2020 season. It remains to be seen whether the latter would offset the costs of the UK regulatory measures without taking into account the risks associated with Brexit. However, the merged company would most likely provide leadership in the UK, the largest and probably most active gambling market in Europe.