Paddy Power Freefalls After Ireland’s Tax Whammy

Paddy Power Betfair had £250bn wiped off its value yesterday following an announcement by the Irish finance minister, Paschal Donohoe.

The current turnover tax rate of 1% will be going up to 2% for all bets, both retail and online. The duty on gambling exchanges in which bookmakers match bets placed by punters will also rise, going from 15% to 25%. The rise comes amid warnings from gambling companies based in the country that the hike would “kill the industry”.

The announcement comes as a further blow to the FTSE 100 company that has seen its share value fall by 30% over five months.

Potential €23 million cost

Paddy Power Betfair released a Regulatory News Service (RNS) to the London Stock Exchange that said that it expected the cost of the tax rise to be “an additional £20m sterling (€23.8m, $26m) of betting duty” if the rate were applied to this year’s figures.

The group has over 260 locations in the country, along with a large number of online gamers who live in the territory too.

By the end of trading on 8 October shares were at 6,510 pence per share, before falling sharply to 6,175 pence per share at the end of trading on 9 October.

It comes after a tumultuous six months for the operator as only in May Paddy Power Betfair’s shares were trading at 9024.9 pence per share (price valid as at 31 May 2018), which equates to 33% written off in just half a year.

To date, no other operators, such as William Hill and GVC Holdings, have emerged relatively unscathed.

Donohoe said the increased rate should generate an extra €51.6 million a year ($59.54m) in tax revenues for the government. Analyst Joseph Quinn and Michael Mitchell of Davy Stockbrokers in Dublin said the increased tax rate could cut Paddy Power Betfair’s post-tax revenue by 4%; they also noted the importance of the Irish market in the company’s structure.

Betting shops to close

The Irish Bookmakers Association, which represents more than 700 Irish betting locations, has predicted the tax increase could close almost 50% of its members’ stores. The Association’s chief executive Sharon Byrne said up to 1,500 jobs could be lost as a result.

Byrne said: “It’s absolutely horrific and it’s hitting hardest the little guys. Four hundred and fifty shops closed in the recession, leaving just 200 of them, and their shops are absolutely unviable at a 2% turnover tax.”

Solicitor and McCann FitzGerald partner Alan Heuston echoed these views: He said: “We’ve already seen a drop in the number of licensed retail premises, but this increase may result in further consolidation and closures and, subsequently, job losses and a loss of tax to the exchequer.

“It could also drive customers to black market operators who operate remotely and do not pay the existing 1% rate of tax.”

Hit from every angle

As well as the Irish tax rate rise, the group could be facing turmoil in mainland Europe due to the changing climate in countries such as Italy, where betting advertising in sports is being banned.

Its Australian brand Sportsbet has also been struggling recently because of changes in “point of consumption taxes”.

The company announced it had cut its annual earnings guidance by around £12.5m ($16.5m), despite the extra funds generated by the summer’s World Cup. Investors have expressed their disappointment with this year’s figures to date, with six-month growth falling short of predictions too.

Investec analyst Alistair Ross called the figures a “solid miss”. He said: “Paddy Power Betfair stands to gain from the opening up of US betting markets, confirmed earlier this year, and has moved quickly to expand its FanDuel site to capitalize.

“That benefit, though, now appears to be priced into the shares and investors will want to see an improved operational performance and a return to growing market share from here.”

Stocks in the company have suffered as a result, but the Irish government looks likely to stick to its guns on the increased tax rate.

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