After Record Success in 2015, 32Red Primed for a Takeover?

March 14th, 2016

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After Record Success in 2015, 32Red Primed for a Takeover?

32Red has published record-breaking revenue figures for 2015, causing some to speculate on whether the multichannel gambling operator could become a takeover target. A decrease in profit, however, does raise questions for prospective buyers.

Higher Revenue, Lower Profit

32Red’s figures show the online gambling operator increased its revenue from £32.1m in 2014 to £48.7m in 2015, representing a 52% increase. For the 12 months ending 31st December, 32Red cited the acquisition of Roxy Palace in July 2014 as a key contributor in the record financials, having delivered £5.2m.

When analysing profit before taxation, however, the results did not reach the operator’s historic revenue high. Since generating £3.4m in 2014, there was a 68% fall to £1.1m in 2015. After tax, 32Red reported approximately £964,000 profit, but the operator should have known to expect higher costs in 2015.

Point of Consumption Tax

On 1st December 2014, the UK Gambling Commission started to apply a 15% point of consumption tax (POCT) against all gambling revenue generated by UK residents. 32Red and other UK-serving operators were aware that all bets placed in the country would be subject to the tax, so higher costs in 2015 were anticipated by the industry.

In 32Red’s case, the first full year of POCT saw the operator pay £4.8m, which rose significantly from the £0.4m paid in December 2014. Nevertheless, the operator chose to focus on the positives.

Growth Wanted in 2016

A statement from 32Red Chief Executive Edward Ware described 2015 as “a very exciting and indeed record-breaking year for 32Red, achieved despite significant external regulatory and tax headwinds.” Ware proceeded to use the statement to outline plans for growth, rather than to comment on the challenges of POCT.

After explaining how the operator’s organic growth in customers was supported by the purchase of rival brand Roxy Palace, Ware promised:

“Marketing expenditure will be increased again in 2016. We are well positioned for another year of progress”.

32Red’s board of directors added that growth would come “both organically and via acquisitions”. In particular, the board is “encouraged by regulatory developments in new European markets.” This suggests the operator will look to the continent in 2016, building upon 2015’s £1.2m investment in the Italian market.

32Red Could be Takeover Target

Following the record performance, some analysts believe 32Red’s success has increased its acquisition potential. Eric Opara, TMT Equity Analyst with Edison Investment Research Ltd, stated in an interview:

“[32Red’s] success won’t have gone unnoticed and we would not be surprised to see 32Red become a takeover target for larger peers.”

Any imminent investment in 32Red would come at a busy time for the UK gambling industry. Paddy Power and Betfair’s approved merger in February 2016 has created an entity with the power to generate £1bn revenue annually.

Another story to monitor is if Ladbrokes and Gala Coral can complete their proposed merger by 24th June 2016. The current obstacle is an investigation being carried out by the UK Competitions and Markets Authority, but it’s a positive sign that the case has been approved for fast-track processing. In the meantime, the publicly listed 32Red can only continue to realise its own strategy until any possible merger or transaction is attempted.

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