The corporate bookmaking industry is fiercely competitive with all participants striving to carve out a sustainable market share. Regulatory changes that tighten controls on corporate bookmakers, and new taxes that impact their margins, are key catalysts for this consolidation. The issue is not one of simply increasing market share but of attaining a mass of customers that support ongoing viability. In light of this, it is perhaps timely to consider the key merger and acquisition (M & A) issues for potential acquirers, and in particular off-shore parties, looking to acquire or consolidate a position in the Australian market.
M & A issues
In the context of the potential acquisition of an Australian online wagering business (and in particular, by an offshore acquirer), among the more important (or interesting) aspects of a transaction or Sale and Purchase Agreement (SPA) are the following issues.
1. Allocation of diligence risk
In Australia – and unlike the US, for example – warranties and indemnities are customarily qualified by the due diligence information made available by the vendor, and the purchaser’s interrogation of that material. Combined with the fact that the vast majority of sale processes proceed on the basis of a comprehensive vendor virtual data room, a strategy relying on a proposition that the purchaser can, with confidence, rely on warranty protection in relation to key aspects of the target business, needs to be carefully (re)considered at an early stage.
Our colleagues prepare an annual private treaty M & A survey, which provides a point in time snapshot of the ‘market position’ on various aspects of sale and purchase agreements. In 91% of the deals we have considered, the warranties are qualified by information disclosed the data room, and a purchaser is generally limited in bringing a warranty claim with respect of that information which is fairly disclosed.
2. Regulatory and tax diligence
As we have reported previously, the regulatory landscape for corporate online bookmakers is rapidly changing, or at least change is being heavily debated. Not only does the acquirer need to carefully understand, and to some extent, predict, the current and potential operational restrictions on the conduct of the target’s business as a value impact, it needs to understand the target’s current or historical compliance with existing laws. A couple of illustrations follow.
Complexity of gaming legislationIn understanding the regulatory diligence task, one must remember the nature of the complex regulatory setting in Australia. As a starting point, each Australian state and territory has adopted its own legislation, regulations and conditions for licensees, as well as having its own regulatory bodies. There is also Commonwealth legislation, the Interactive Gambling Act 2001 (Cth) (IGA), which imposes restrictions on online wagering operators. The most recent amendments to the IGA include amendments to strengthen the ban on online in-play betting and the soon to be implemented end to credit betting facilities. The industry also faces further pressure as the Federal Government have announced restrictions on gambling advertising during live sports programs between certain hours.In some respects the regulatory compliance exercise is likely to require an element of judgement – while appearing to be resolved now, the experience of William Hill is apposite: William Hill introduced a ‘click to call’ mobile phone in-play betting function which it considered complied with the law at that time: the Australian Communication and Media Authority (which referred William Hill to the Australian Federal Police), as well as some competitors including Tabcorp, took a contrary view.
Point of consumption tax impost
The gaming and wagering sector has always been a lucrative source of taxation or duty revenue. Very recently (July 2017), the South Australian government introduced a point of consumption tax which subjects 15% of net wagering revenue (NWR) from bets placed in South Australia on horse, harness and greyhound racing; sports (e.g. AFL, cricket and soccer), and certain ad hoc events (e.g. elections or novelty items). The nexus creating the imposition of such tax is that the customer has their registered address in South Australia. Although not yet rolled out in other states, it has been reported that the Victorian and New South Wales governments are considering a similar approach.Tax diligence will have to form a view about the likelihood that each State will impose a NWR tax. It is not inconceivable that a sale transaction might need to allocate the risk that such tax is imposed in a bespoke, negotiated manner.
3. SPA deal terms
SPA terms will conceptually deal with two types of issues: those that are common to similar M & A transactions, and those that need to deal with the specifics of the acquisition of the target corporate bookmaker. The following include several we think are interesting.
- Foreign Investment ApprovalIn broad terms, in Australia, certain acquisitions of Australian businesses by foreign investors will require approval of the Foreign Investment Review Board (FIRB), acting on the instruction of the Australian Federal Treasurer. If approval is required and not obtained by the foreign acquirer before the SPA is executed, the SPA must include a condition precedent that makes the obligation to buy and sell conditional upon either the giving of an approval (in the form of a no objection letter) or the passage of time so that the Treasurer becomes precluded from issuing an objection.Foreign purchasers should appreciate the following about FIRB in the current context:
The gaming sector is not considered a “sensitive business” sector, and so (in broad terms) and subject to particular exceptions or differences which arise by nature of the identity of the foreign purchaser (in particular which whether they are a “foreign government investor”) the asset or equity value threshold above which FIRB approval would be required is $252 million.
If FIRB approval is required, nowadays the process following by FIRB is to liaise with certain other government agencies and obtain “clearance” from them.
Examples include the Australian Tax Office (ATO) and the Australian Competition and Consumer Commission (ACCC). The ATO has a standard set of tax conditions that it will seek to impose on foreign purchasers to confirm / reinforce their obligation to comply with Australia’s tax laws. ACCC perspectives are discussed below.
In competitive sale processes the timing and conditionality of FIRB approval, if required, is almost always a discussion point. Vendors will typically seek to require that potential buyers obtain FIRB approval prior to lodging a final and binding bid. (Well-advised vendors will commonly brief FIRB about the sale process in order to help make the approval process efficient). The ‘complexities’ with this approach include:
FIRB applicants must pay a non-refundable filing fee, likely starting at $25,300, in order to commence the process to obtain approval; and
the timing of the sale process must allow for dealing with FIRB: while there is a relatively short (e.g. 30 day) statutory consideration period, in practice the process for business approvals often takes longer than this to secure approval.
A regular discussion point in competitive sale processes where FIRB approval is not a pre-bid requirement is the vexed question of which party takes risk that FIRB approval is not provided. We would suggest that at present the vendor would most usually bear this risk and, therefore, for example, not be subject to a break fee or similar liability. In this present context, the far more important question on completion conditions is the allocation of risk in obtaining required regulatory approvals to ensure that the vendor has the appropriate licence to conduct the business.
Australian competition and anti-trust laws prohibit mergers that have the effect of, or which are likely to have the effect, of substantially lessening competition in a market. Broadly there are two proactive pathways that can be followed by merger parties – informal clearance or merger authorisation. There is, however, no requirement for merger parties to notify the ACCC of a merger.In the present context, given that consolidation in the corporate bookmaking is expected and is, to some extent, driven by the commercial objective of reducing or eliminating the number of competitors, early consideration of potential ACCC issues should be undertaken.Relevantly, the ACCC has published ‘notification thresholds’ – broadly the ACCC encourages merger parties to notify them if a merger between competitors would result in the merged entity having a post-merger market share of 20%.Interestingly, in relation to the current high-profile proposed merger between Tabcorp and Tatts, both of which operate corporate online and telephone betting businesses (as well as several other relevant activities including wagering and media, gaming services, Keno, and lotteries), the ACCC said in their initial Statement of Issues that, insofar as they considered the consolidation of the separate corporate bookmaking services operated by each (TAB and Luxbet; and UBET):“It is our view that strong completion between online corporate bookmakers will mean recreational customers will continue to have choice about where to place their bets.”The ACCC identified Sportsbet, William Hill, Ladbrokes, Bet 365 and Crownbet as the major corporate bookmakers.
- Capturing completion economiesThe typical SPA discussed in this context will include a bespoke regime that will transfer full economic benefit of the business from vendor to purchaser on the selected economic transfer data – typically a precise time on the chosen completion date (i.e. a “transfer time”). It would need to set out how to typically deal with, for example:
- taken bets - undecided wagers placed by customers;
- placed bets - wagers placed by the target business;
- at risk payments by customers (for example, repudiations or refusals to pay by customers in connection with defined credit transactions);
- remaining balances of customer accounts; and
- payments due on settled bets not made before the transfer time.
- Transition and migration issuesThere are at least two relevant categories of transition issues in the case of a consolidation transaction: the transition of customers from one platform to another and secondly the transition of business operations and core systems.The first transition is the hardest.Migrating single-platform customers onto a new platform requires some form of interaction with them. The issue is not always privacy related (the typical corporate bookmakers’ privacy terms may seek to create the flexibility to accommodate a transfer of business operations to a successor entity (i.e. a person to who the provision of the wagering services is transferred)). The issue is one of transferring the rights and obligations (and credit balances, etc.) created under applicable betting terms and conditions.The terms of the SPA would need to reflect requirements to transfer and migrate target customers and associated accounts, taking into consideration the account holders rights and obligations.The SPA would also deal with system and operations issues. Apart from being a crucial diligence item, the typical SPA under consideration would likely need to deal with pre- and post-completion technology and information system issues, including databases migration payment and processing and financial management systems. For example, corporate bookmakers may use different credit-card processing service providers.The SPA would also need to capture any transfer of ownership of the relevant IP and IT of the vendor.
4. What else would be covered?
Our SPA under consideration would (again, depending on how the acquisition is structured) deal with the following types of uses in addition to the myriad of standard sale agreement terms applicable, to any M & A transaction:
change of control consents for key contracts – an example is likely to be (given the structure of the Australian market) key contracts with broadcast rights holders for the use and broadcasting of racing and sporting vision;
transfer of domain names and website information, as well as intellectual property rights (including business or trading names) in the target business;
non-competition and restraints of trade to protect the goodwill of the business required; and
pre-completion conduct of the target in relation to the conduct of bookmaking operations (and in particular, risk and compliance policies).
If media reports prove accurate, the Corrs Gaming and Wagering Group expect 2018 to be a busy year for principals and their advisors, as well as regulators. The industry dynamics and the need for scale in business operations would seem to leave no alternative in the near to medium term.