Betfair retreats from Germany

Country's gambling tax makes group's core betting exchange unviable

Online gambling group Betfair has withdrawn its online sports betting exchange in Germany, blaming the country's gambling tax regime for making its main product unviable.

The company has been arguing with German tax authorities that its main product should not attract the 5% tax on stakes, as it does not actually take bets but allows punters to bet with each other.

Shares in the group initially slumped on the news - although they have recovered since and are trading slightly down on the day at around 750p. The company floated in 2010 at £13 a share on the back of a growth strategy that included geographic expansion.

The gambling group said:

Betfair has been working with the relevant tax authorities to seek clarification on interpretation of the law and its applicability to exchanges. The company is disappointed, however, that to date the tax authorities have not been able to agree to an interpretation of the law that would allow Betfair to continue to offer the exchange product. Consequently, Betfair has decided to withdraw its exchange product from the German market.

It added:

In FY12, approximately 4% of [betting exchange] revenue came from Germany and this revenue delivered a contribution of approximately £6m before the allocation of central costs.

Betfair said that the remaining part of its business in Germany - which includes poker, casino and more traditional fixed-odds betting - would now be minimal following the withdrawal of the product. It has been paying the small amount of tax it owes on those businesses, but has been filing returns for its betting exchange product which state no tax is due. Analysts estimate that if the German authorities force Betfair to pay tax on the betting exchange business, it will retrospectively owe as much as £25m.

James Hollins, an analyst with Investec, which was one of the few brokers not to fall for the Betfair flotation spin, said:

Betfair is to withdraw its betting exchange product from the German market. The negative impact on our earnings is c10%. Sadly, this is not an issue of a lack of legislation (Germany has regulated sports betting), but an issue around the type of taxation that makes Betfair's exchange model uneconomic. Hence, even if the EC were to direct Germany to regulate casino and poker, it is unlikely to challenge the wager tax, as per regulation in France.

While Betfair-friendly gross profits taxes have been favoured elsewhere in territories such as Spain and Italy (but not France), this is a blow to Betfair's model and a clear negative. We retain our SELL recommendation on Betfair and move our [price target] from 625p to 600p.

Betting companies prefer to be taxed on their gross profits – in effect, the profits they make from punters – rather than turnover. Turnover is classified as the total amount of money staked with a bookmaker, but that figure will include money that a successful gambler has already won. For example, a winning £5 bet at 2-1 would return £15 to a gambler (£10 winnings and the return of the £5 stake); if he then bets the £15 and loses, he makes a net loss of £5. Under a gross profits tax the bookmaker would be taxed on the £5. Under a turnover tax, it is taxed on both bets, or £20.

For Betfair that equation gets worse as its punters tend to place lots of bets during a sporting event as the action unfolds, rather than the more traditional method of a few bets before the start of an event.

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