Evoke Weighs Sale as UK Tax Hikes Press on Profit Margins

Evoke, the UK-based gambling company that owns William Hill and 888, has announced it is conducting a strategic review that could include a potential sale of the company or parts of its business. The move follows significant tax increases in the recent UK Budget, which are expected to raise the company's duty costs by up to £135 million annually from 2027. Evoke has retained financial advisors Morgan Stanley and Rothschild to assist in evaluating its options.

The company's shares rose 10% on Wednesday after the announcement, providing some relief after hitting a record low earlier in the week. Evoke's management emphasized that the strategic review does not guarantee any sale or restructuring but is a response to the challenging financial environment. The company has previously indicated it might close up to 200 retail sites to mitigate the impact of the tax increases.

Evoke's management cited the recent UK Budget changes as a key factor driving the strategic review. The Chancellor increased remote gaming duty from 21% to 40%, effective from April 2026, and introduced a new 25% duty on online sports betting from 2027, with the exception of horse racing. These tax hikes are expected to significantly affect Evoke's profitability, pushing the company to explore options to maximize shareholder value.

Implications of Tax Increases

Evoke has estimated the combined tax increases will raise its duty costs by up to £135 million annually from 2027. The company has not yet disclosed how many of its retail sites it may close, but prior comments suggest it could shut up to 200 stores if forced to absorb the tax burden. Evoke is also considering changes to its customer offerings, supplier negotiations, and market adjustments to offset the financial impact according to industry sources.

The UK government defended the tax hikes as a way to reduce gambling-related harm and increase tax revenue. However, Evoke has criticized the changes as "highly damaging" to the industry, arguing they could push customers toward the black market and result in job losses and reduced investment in UK sports.

Market Reaction and Strategic Options

Evoke's share price had fallen 60% over the start of the year before rising 10% on Wednesday. The market reaction suggests some optimism that the strategic review could lead to a restructuring or sale that would better align with the company's financial goals. The company's board has hired Morgan Stanley and Rothschild to oversee the review, but it emphasized there is no certainty any transaction will occur.

In its Q3 results, Evoke reported revenue of £435.4 million, a 5% increase from the previous year. The UK and Ireland online business contributed £163.3 million, up 1% year-on-year, while UK retail revenue rose 6% to £121.7 million. The international division, which includes operations in Italy, Spain, Denmark, and Romania, saw 8% growth in revenue to £150.4 million, driven by a 13% increase in gaming revenue.

Challenges and Previous Issues

Evoke's decision to explore a potential sale or restructuring comes amid a broader set of challenges for the company. In 2023, Evoke removed its chief executive and suspended VIP customer accounts in the Middle East following an internal investigation into anti-money laundering failures. The company has also faced regulatory penalties, including a £9.4 million fine in 2022 for multiple failings related to gambling addiction during the pandemic according to government reports.

The company's troubles have not been limited to regulatory issues. Evoke's shares have been under pressure due to its high debt load and the ongoing uncertainty in the gambling sector. The company has previously outlined plans to reduce capital spending and adjusted EBITDA, reflecting its focus on cost management.

Outlook and Shareholder Considerations

Evoke has reiterated its guidance of an adjusted EBITDA margin of at least 20% and has outlined medium-term financial targets, including annual revenue growth between 5% and 9% and approximately 1% of adjusted EBITDA margin expansion per year by 2027. The company's strategic review is expected to build on these targets by exploring ways to enhance shareholder value through restructuring, asset sales, or a full acquisition.

The company's international performance has been a bright spot, with strong growth in Italy, Denmark, and Romania. Evoke operates William Hill online and dedicated 888 websites across casino, sports betting, and poker in Italy. The international division's Q3 results reflect the company's continued expansion outside the UK and its ability to adapt to changing market conditions.