Increased regulation and high-level consolidation have raised the odds for in-house lawyers playing in the gaming and betting industry
When Edward Traynor took the general counsel (GC) position at Paddy Power in April 2015, he arrived in the middle of a £400m return of capital to the business’s shareholders. Once that was completed, he planned to settle in, restructure the legal team and take a holiday after the company’s annual general meeting (AGM). That holiday never happened. Instead Paddy Power agreed a £7bn merger with Betfair to create one of the world’s largest online gambling businesses with more than 7,000 staff and £1.2bn in sales. Even the best-laid plans often go awry.
‘Because of the [financial] results schedules, the companies couldn’t wait as it wouldn’t be possible to talk to their investors and not mention the deal’, recalls Maura McLaughlin, corporate lawyer at Arthur Cox who led on the deal for longstanding client Paddy Power. ‘They had to decide whether they were doing the deal ahead of the results announcements. What should have been the summer lull, after completing large returns of capital and the AGM, became an incredibly busy period as the transaction started to take on some momentum.’
In the gaming and betting industry, GCs and legal teams are used to juggling conflicting demands. The pace of change in the industry over recent years has been particularly startling, with typically lean legal teams often overseeing consolidation as well as a dramatic change in the regulation of online operators following the introduction of the Gambling (Licensing and Advertising) Act 2014, which means that gambling in the UK is regulated at the point of consumption rather than the point of supply. Additionally the subsequent point-of-consumption tax means operators are now liable to pay remote gaming duty of 15% on their products from UK customers, irrespective of where the online operator is situated.
This means that online operators, who are predominantly based offshore in the Isle of Man or Gibraltar are now answerable, along with bricks-and-mortar operators, to the UK Gambling Commission (UKGC) which, under new chief executive Sarah Harrison, is increasingly showing its teeth. Previously only 15% of remote gambling operators had a UKGC licence.
‘These companies have had to get used to a different form of regulation and over the past two-and-a-half years the UKGC has really turned the regulatory screw so that things are getting more closely regulated,’ notes Olswang gaming and media veteran David Zeffman.
Meanwhile, headline-grabbing consolidation continues to put the industry in the spotlight, with Ladbrokes’ £2.3bn merger with Gala Coral and GVC Holdings’ £1.1bn takeover of Bwin Interactive Entertainment following a bidding war with 888 Holdings, just two of the recent big deals in addition to the Paddy Power/Betfair merger.
Managing regulation and consolidation in what is essentially a technology industry and all the issues that come with that – pace of change, cyber security, money laundering and corruption, to name just a few – means that this sector stretches its in-house lawyers more than most.
Says David McLeish, partner at media specialist Wiggin and the former GC and group head of legal at gambling software development company Playtech: ‘These guys are all up to their eyes because they have to juggle M&A and regulation in an industry that is growing very quickly, which at the same time is presented with all the challenges that any online digital business faces in terms of money laundering, data protection and intellectual property issues, and all the general challenges. There is an overlay over and above what any other digital business would face in terms of the peculiarities of the sector. So it makes it a very interesting, dynamic and exciting sector. But it also makes it bloody hard work.’
‘These guys are all up to their eyes because they have to juggle M&A and regulation in an industry that is growing very quickly.’
David McLeish, Wiggin
Eye in the sky
The rapid development of regulation in the industry is creating work for both in-house lawyers and external advisers alike, particularly as the European regulatory framework for gambling has continued to fragment, with some countries introducing local licence regimes, while others, particularly Germany, effectively regulate online gambling. External counsel are benefiting in particular on the ground in terms of local licences in individual jurisdictions.
‘The pace of change of regulation both in terms of countries regulating and countries introducing systems where, for example, they are trying to ban or limit the licensing systems in markets – there is work on that front,’ says McLeish.
‘The gambling industry would love a European framework for gambling,’ says Michael Leadbeater, director of group legal at William Hill. ‘If there was a unified regime it would hugely reduce costs and friction, but there is very little appetite to harmonise it. There is a wide divergence of views between European countries on how gambling should be regulated. Some have a very liberal view of it, like the UK and Ireland. Others have a more restricted view and try to prohibit it. The UK is the most liberal when it comes to gambling, without a doubt.’
Yet despite the UK’s relaxed approach to gambling, there are a vast number of regulatory obstacles in-house teams are currently facing, which include a proposed change to the UKGC’s enforcement strategy, a triennial review of gambling machines by the Department for Culture, Media & Sport, as well as a Competition and Markets Authority (CMA) investigation into the fairness of online operators’ terms and conditions and practices. The CMA investigation, although aimed at operators, also affects suppliers in terms of the technical standards of the technology they are providing.
‘The CMA review is ongoing at the moment and we responded to that,’ says Scott Yelle, GC for Sky Betting & Gaming. ‘That affected us in that it also looked at how gambling is advertised on TV in particular. That is of particular interest to Sky as a shareholder as it impacts on its advertising on Sky Sports, for example.’
In addition, in-house teams are also having to deal with a crackdown by the Information Commissioner’s Office on the use of personal data by gambling affiliates, the implementation of the fourth anti-money laundering directive, the impending taxation of free plays and the government minister responsible for gambling, Tracey Crouch, indicating that online bookmakers would be required to pay the expanded Horserace Betting Levy at 10%.
However, for Stephen Sweeney, GC at bet365, the real challenge for in-house teams does not come from regulation but from the pace of change in the industry.
‘I don’t think our industry is more heavily regulated than the financial services industry per se, but what we do face is significantly less harmonisation of regulation than the financial services industry, particularly within Europe.
‘I don’t think there are many industries that match the pace of change that we see, not only in licensing requirements but also in product development and such. It’s worth remarking that, as a purely online operator, in addition to being a gambling business, at the heart of our service, we have a very sophisticated, largely proprietary IT product. We are a technology company as much as anything else. We employ almost 1,000 software developers in our business and, to that extent, there aren’t many ‘service industry’ businesses that are comparable to ours.’
With lean teams, the in-house compliance side has typically grown faster than the legal side in response to the increase in regulation.
Says Leadbeater: ‘The compliance team, which sits in the legal team, has been boosted significantly over the last two years as we have got to grips with UK regulation and increasing fragmentation of rules.’
According to McLaughlin, in-house teams have historically used a three-pronged approach when it comes to handling increased regulation. The first looks at government affairs and what policymakers are concerned about; the second is a more conventional compliance function approach, which involves horizon scanning around risk and technology; and the third covers the existing regulation that any listed company should be prepared for.
‘Frankly, the ever-increasing regulation is one of the reasons why consolidation makes a lot of sense. The issues are the same whether your company is £100m or £100bn, so the scale of your business can be significantly increased without a significant uptick in compliance costs.’
‘Because Sky is an established brand, we compete, but consolidation has an inhibiting factor on smaller players.’
Scott Yelle, Sky Betting & Gaming
Double or nothing
Regulation is just one factor behind the consolidation in the industry. The competitive landscape driving up the costs of player acquisition and retention, and the patchwork of international gambling regulations, which has forced even the larger competitors to focus on fewer jurisdictions, have pushed operators towards scale. The growing maturity of the online sector has also provided the funding needed for larger transactions with private equity houses CVC Capital Partners (Skybet), The Blackstone Group (Amaya) and Cerberus Capital Management (GVC) deploying equity and debt funding.
Although the focus has been on headline-grabbing deals in recent years, there has been a constant stream of M&A activity in the sector over the last decade, predominantly in the mid-market.
According to data from Mergermarket, the biggest year for deals in the UK betting and gaming industry since 2010 was 2015, with 11 deals and a combined value of £2.9bn. However, apart from 2015, the deal count has not increased significantly, although the value of the combined deals has. In 2010 there were eight deals, with a combined value of £232m and in 2016 there were nine deals, with a combined value of £1.5bn. The worst year for M&A was 2013, with four deals and a combined value of £43m.
Hilary Stewart-Jones, an intellectual property and technology partner at DLA Piper, believes consolidation does not cause too much of a headache for in-house teams, who will farm out the high-level work in most cases to external counsel.
‘Consolidation hasn’t brought a huge amount of challenge, apart from some peripheral competition perspectives, and it is fair to say the competition authorities have understood how the online industry works in terms of the consolidation. What does come about as a result of consolidation are inconsistent compliance policies, so for example you will find Operator A decides it is comfortable taking business from grey markets, but when it is acquired by Operator B they might have an inconsistent compliance policy and that is quite difficult to reconcile.’
However, consolidation is having a negative impact on the industry for the smaller operators who are finding it increasingly hard to survive.
Says Yelle: ‘It clearly creates some heavyweights and larger players in the industry that we have to compete against. We were part of a big plc in Sky. We were bought out by private equity two years ago and so we’ve got that funding behind us, and the support of both Sky as a minority shareholder and the PE funds. Because we are an established brand, that allows us to compete, but it certainly has had an inhibiting factor on smaller players to be able to compete with the deep pockets and big reach and expertise of the merged entities.’
Naturally, consolidation also means that there are fewer GC jobs in a niche industry and there has been a lot of movement of individuals as a result (see box above). ‘Consolidation will continue through both small and large companies,’ says Zeffman. ‘It also means that there are fewer positions because when you have a GC for each of the merging companies, one of them will typically lose their job.’
Consolidation may mean fewer clients for law firms in the long term, but the significant workload that an in-house team has to manage means that the niche area of betting and gaming has also become a growth area for law firms in this area.
As Sweeney sums up: ‘We have a pretty compact in-house legal team and, of course, one always has to take advice on specialist areas. However, our main expansion in terms of external legal advice has been driven by the move to local licensing in individual jurisdictions. Since the beginning of 2012 onwards, we’ve moved from being licensed in the UK and Gibraltar to now holding licences in 11 separate member states plus Australia, with several more in the pipeline. So with little to no real harmonisation as regards licensing requirements, that has really stepped up the amount of both internal and external legal advice that needs to be obtained and then dispensed across the business. In short, we therefore necessarily use a lot of external lawyers across the world… and we all work pretty hard!’ LB
kathryn.mccann@legalease.co.uk
Standout GCs in the gaming and betting sector
In the niche area of gaming and betting, most general counsel (GCs) are well known to their counterparts in private practice, with consolidation providing an opportunity for partners to move in-house and vice-versa. Alex Latner, a long-term adviser for Playtech while a partner at Berwin Leighton Paisner (BLP), moved in-house to take the GC role at the gambling technology provider at the beginning of this year and is described by DLA Piper’s Hilary Stewart-Jones as having ‘a huge breadth of experience in the sector’. Playtech is still a major client for BLP, which has acted for the company on several corporate acquisitions and disputes.
Michael Leadbeater at William Hill and Stephen Sweeney at bet365 are also well established within the industry and are described as ‘very impressive guys’ by one private practice partner, who adds: ‘They are working for very big organisations in a highly-regulated environment, where the pace of change and the growth of industry is pretty extraordinary. You tend to find that in one way or another they have done and seen most things.’
Meanwhile, Edward Traynor is now the group GC and company secretary at merged company Paddy Power Betfair, and Ladbrokes Coral Group appointed SuperGroup’s legal chief Lindsay Beardsell as group GC for the newly-merged business. Annabel Bannerman and Harry Willits, the respective GCs for Ladbrokes and Gala Coral, are currently aiding Beardsell in the transitional period for the company, but it is unclear whether either will remain at Ladbrokes Coral in the longer term to lead the in-house team of ten lawyers.
At Paddy Power Betfair, post-merger, there are around 16 staff in the team across legal, government affairs, and risk and regulation, with the compliance team sitting within legal and reporting to Traynor. In-house teams in the gaming and betting sector tend to be lean, with most operators functioning with fewer than ten lawyers, while suppliers typically have more because of the heavy contract work involved. However, this is not a universal rule. Says James Elliott, GC at gaming supplier NetEnt: ‘I have a team of five people here. I like to have people who are specialised in e-commerce, who understand data protection and protection of intellectual property, who can negotiate commercial agreements subject to Swedish law, Maltese law or the law in Gibraltar. My team is split over these three locations.’
Elliott, in a similar structure to most legal teams in the betting and gaming industry, prefers a centralised team with local assistance from lawyers on the ground in Europe. ‘For regulatory, you tend to have a local lawyer helping you out. We can’t be expected to know what the laws are in Spain and keep up with that. We have a compliance team as well, separate to my team, and we both report into the chief financial officer.’