Brazil appears to have chosen the strictest regulatory path among those under discussion, with President Lula signing a provisional measure that prohibits nationwide the operation, offering, intermediation and advertising of fixed-odds betting.
Although the initial reports referred to a ban on sports betting, we understand that, under Brazil’s legal framework, fixed-odds betting has a broader scope and may concern either real sporting events or virtual events of online games, Eurobank Equities notes in its analysis.
As a result, our reading is that the measure effectively shuts down the country’s entire regulated online gambling market, and not just sports betting.
The restrictions are also immediate, as new deposits are prohibited immediately and websites/apps are required to be taken offline from October 6. Existing federal and state licenses will officially cease to be valid after 30 days, while advertising and sponsorships must be withdrawn within 10 days.
The measure explicitly states that licensing fees will not be refunded and provides no right to state compensation. Separately, the government has submitted legislation introducing criminal penalties for illegal betting activities and the facilitation of payments.
For Allwyn, the exposure arises through its 36.75% stake in Betano, with Brazil representing, according to our estimates, about 44–46% of Betano’s revenues. We estimate, the analysts write, that Betano will contribute about €230–240 million in income from an associate to Allwyn, an amount corresponding to about 13% of the group’s adjusted EBITDA, including investments, and, importantly, to annual dividends of more than €250 million, according to our calculations.
On a simple proportional basis, therefore, a full loss of the business in Brazil would put at risk about €110–120 million of annual income from an associate, an amount corresponding to about 6% of the group’s adjusted EBITDA, alongside a corresponding amount of annual cash distributions.
The exact impact will depend on Brazil’s actual profitability relative to the rest of Betano and on the extent to which operating costs can be adjusted.
The MP (Medida Provisória) takes immediate effect, but must be approved by Congress within 120 days in order to remain permanently in force, leaving room for amendments during the legislative process. In addition, operators that only recently paid the price for five-year licenses are likely to explore legal avenues, although the MP explicitly excludes the refund of licensing fees and state compensation.
That said, at this stage we would assign no value to any potential recovery. Beyond the legal process, Betano should be able to redirect capital to other markets, partly mitigating the impact on its medium-term growth profile.
In addition, concerns regarding the shift toward illegal operators, lost tax revenues and the impact on sports funding are likely to form part of the discussion in Congress. These factors create room for different developments regarding the final outcome, but, in our view, contribute little to mitigating the immediate operational disruption.
We previously valued Allwyn’s 36.75% stake in Betano at about €3.0 billion, an amount corresponding approximately to 12–13 times our estimate of Allwyn’s share of Betano’s earnings.
With Brazil representing about 44–46% of Betano’s revenues, we assume a proportional loss of earnings, which reduces by half the value of Allwyn’s stake, to about €1.5 billion.
This reduces Allwyn’s equity value by about €1.9 per share, bringing our target price to €11.1 from €13.0. We believe this constitutes a reasonable starting point, although this impact could be mitigated by: 1) operators seeking legal remedies or compensation; 2) Betano’s strong financial position, which means that short-term dividends to Allwyn could prove more resilient than the impact on earnings alone would suggest.
On the other hand, Brazil has been a significant factor for Betano’s growth profile and cash distributions, therefore the remaining business outside Brazil may also justify a lower multiple than the 12x we previously applied.
Importantly, these scenarios reflect only the direct reduction in Betano’s value and do not incorporate any broader compression of Allwyn’s own valuation multiple, amid higher regulatory uncertainty and uncertainty regarding cash flows.
We note, the analysts write, that we will update our detailed estimates for earnings and cash flows once there is greater visibility regarding the process in Congress, the implementation of the ban, Brazil’s actual profitability within Betano, the scope for cost mitigation and Betano’s future distribution policy.