Gambling Privatisations: A Bet Worth Taking?
The Greek government has decided to privatise the state gambling monopoly OPAP. The Spanish government is to sell 30% of its national lottery operator ONLAE. A report commissioned by the Irish government recommended that the grant of a new seven year license to operate the National Lottery should be the subject of an open competition instead of being run by the state controlled postal service.
At first glance it might seem that countries at the periphery of Europe are being swept by a desire to liberalise the gambling sector. But on closer inspection their motivations for privatising their state owned gambling operators have to do more with their desperate financial situation than any ideological fervour towards private ownership or liberalisation of the gambling sector.
The privatisation of OPAP has been on the cards since the Greek government was forced to seek a bailout from its EU partners and the International Monetary Fund a year ago. Greece was forced to accept an extensive privatisation program of public assets and a stringent reduction of public expenditure. OPAP is the largest listed gambling company in Europe and the Greek Finance Ministry intends to raise at least EUR1bn from its 34% stake. Additionally the government is also privatising the Horse Racing Organisation of Greece (ODIE).
The Irish situation is rather similar to Greece. Ireland was also rescued by the EU and IMF, and like Greece, a harsh public sector cost cutting exercise and a privatisation program were imposed. The Spanish government has not asked to be rescued but is trying to stay ahead of the game by imposing on itself a cost cutting and a privatisation program. It hopes to raise ‚Ç¨5bn from the sale of its stake of ONLAE.
But are these privatisations an investment opportunity or are they a trap?
The privatisations do not come alone but they are accompanied by new gambling regulations. The good news for prospective buyers is that the new Greek and the Spanish regulations are tilted in favour of the state operators.
In Spain ONLAE was actually heavily involved in writing the law and the proposed Greek gambling law would allow OPAP to continue as a monopoly in some online gaming spheres until 2019.
So it would not be a surprise if investors find buying a company with tailored regulations an attractive prospect. But investors need to also keep in mind that desperate governments will try to squeeze investors to give away their assets.
Another issue to keep in mind is the tax regime.
The Spanish government has opted for a 25% of gross profits (after initially considering a 10% on turnover), which is not exactly very competitive. But the Greek government is considering a 30% on gross profits (after initially considering 6% on turnover). The Irish government is considering introducing a 2% tax on winning bets.
However, the strategic issue is whether the countries where these newly privatised companies operate are safe markets to enter.
Greece is in a deep hole. It was bailed out a year ago, and it already requires a further bailout. The list of economists who think that Greece is incapable of paying its national debt is getting longer and the idea that it could leave the Euro is not an implausible notion any more. If Greece defaults it is very likely it will drag Ireland with it as the markets will refuse to refinance another Euro member in trouble. It is possible the contagion would spread to Spain.
It would be a challenge, to say the least, to manage enormous gambling companies in markets where the tectonic plates are shifting rapidly.
The gambling market size would appreciably shrink because liquidity would dry up, and due to the defaults the countries in question would be shut out from the global financial markets. If any of the countries were to leave the Euro, living standards and earnings would be negatively affected for a considerable length of time because their debt would still be in Euros while they re-introduced local currencies.
Of course these are the worst case scenarios, but it seems that the worst case scenarios outweigh the best case scenario by quite a stretch.