Sweden: 2019’s biggest short or a bull market in waiting?

Looking at the current state of Sweden’s newly regulated igaming market, RB Capital’s Julian Buhagiar says savvy investors will be steering clear, and those with an interest looking for an exit.

Whilst it is true that, from a broader investment perspective, a significant amount of drama is unfolding on the bond and futures market, there is a more pertinent developing story taking place in the Swedish gambling equity markets.

To fully appreciate the scale – and future impact – of these developments, it’s worth revisiting the hype and anticipation in December 2018, when many expected Sweden’s re-regulated market to be the highlight of 2019. With a raft of operators speaking of their ambitious plans for one of Europe’s most exciting markets, the future indeed looked bright.

Eight months on, and few would disagree that things didn’t turn out quite as expected. A slow-motion implosion of nose-diving share prices, a raft of fines to cover the deficit of a third world country, and a swift revocation of gambling licenses not entirely dissimilar to the pre-1930s prohibition era.

Earnings reports have made for sober reading, with regulated revenues down at least 15% year-on-year in comparison with last year’s ‘grey’ market. In all likelihood the decline will be closer to 20% once the full reports are in.

Not for the faint hearted  To date, the regulator has sanctioned 15 companies in total, with one licensee fined twice, and another stripped of its licence entirely. Insiders warn of additional – harsher - penalties on the way, with GVC and GiG among those who are prepared to go through Sweden’s stringent legal process to defend their name in court.

In alternative territories, such turmoil would typically have speculators relying on the stability of larger players’ share prices, but this does not seem to be the case for Sweden. High cap stocks such as Betsson have not fared any better, nor has Kindred (unsurprisingly, in hindsight).

So what has gone wrong? After all, investment in a regulated market in one of Europe’s most advanced and stable economies was meant to be safe as (non-UK) houses. Sweden should have been a case study in taxing and regulating an online gaming market. It’s thus worth taking a look under the bonnet to dissect what should (and shouldn’t) have happened. This narrative might not be for the faint hearted - especially those who have long positions on Swedish gaming equities!

In retrospect, it’s no doubt that the Swedish Gaming Authority’s lack of clarity on regulations was an unnecessary spanner in the works. Breaking the rules is far easier when nobody knows what the rules should have been in the first place (as opposed to, say,  Italy, UK, Germany and the Netherlands, pre-2015). Bonusing is a particularly contentious point here – with all ‘economic incentives’ linked to games currently banned, how far does this go? What is the end-point of an economic incentive? Most legislative rule books fail to outline this clearly, much less Sweden.

Sports betting has fared even worse under these new regulations. How can a bookmaker possibly predict if (and when) an under-18 football player will be a surprise addition to the team sheet? Should all markets be frozen as soon as they are brought onto the pitch? Can punters still place a bet if the players doesn’t make a substitute appearance? From a venture capitalist’s standpoint very little capital will flow into a country where all bets could suddenly be called off at a moments’ notice. Or, as was the case with Global Gaming, a license gets revoked with virtually no explanation or clarity.

Immeasurably high barriers This author is a supporter of regulation and compliance – but only when done properly. It’s essential to create a marketplace of trust in a newly regulated territory, and even more so when it comes to levelling the playing field. Ironically, the SGA has arguably done the opposite and made the Swedish market the world’s most inhospitable territory for gaming operators to do business.

Until the SGA starts to provide more clarity, investors do not expect things to change. We’ll likely see the law of unintended consequences play out in real time as money flows back into the black markets. After all, punters still want to place a bet – if the ‘white’ market is unable to provide this service, punters will go elsewhere (as has happened in Italy). It’s simple behavioural economics in action. A cultural desire to start and stop betting cannot be controlled by a regulator. Until the SGA provides a suitable framework to operate effectively, it will have unfortunately achieved exactly that – a reason to go elsewhere.

It doesn’t stop there unfortunately. If an oligopolistic market was what the SGA wanted; they’re certainly getting it. With the threat of eye-wateringly high fines based on a rulebook that remains disconcertingly vague, many smaller operators are now running in the opposite direction from anything with the ‘Sweden’ name on it.

Currently the market is shaping up to be one in which only the most financially robust operators, those capable of weathering the turbulent storm of excessive fines, are left.  And we’ll soon see just what such a market, with little to no competition and immeasurably high barriers to entry, looks like. Uncompetitive pricing and lack of incentive to innovate will be just two of the many consequences – and it leaves very little space for optimism.

So, what happens next? Of course, the market needs to stabilise first, which hopefully will happen in the next nine months to a year. There were bound to be teething problems in the first few months, but given the way this year has unfolded, ongoing issues will continue well into 2020, and likely beyond.

Logically, if the SGA intends to claw back its position, it will need to provide more clarity on regulations, and learn its lessons. It is the view of many prominent investors that the SGA would do well to take a leaf from the Danish regulator’s playbook. While Spillemyndigheden carries a big stick for enforcement (which is not used unsparingly), it takes a pragmatic and transparent stance with operators, providing clear guidelines and sensible tax levels.

Once the SGA provides the industry with understandable interpretations of the rules it is putting in place, there should be an improvement, and with it a buy-in from the international players. Until that happens the smart money will stay on the sidelines and any decent investor worth their fund will be hitting the sell button at any Swedish operator’s public listing.