bwin.party and 888's results show why there are so many huge gambling mergers right now

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Betting company Bwin Interactive Entertainment AG logo is pictured with chips on a poker table during an event in Paris, December 3, 2010.

REUTERS/Charles Platiau

Online gambling operators bwin.party and 888 Holding both put out half-year reports on Friday and both, in their own way, suck.

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First, bwin.party, which is being courted for a merger by both 888 and GVC Holdings.

bwin.party's total revenue - the amount of money people are actually spending on its sites - fell from €317.1 million (£231.7 million, $357.3 million) in the same period last year to €296.5 million (£216.6 million, $334.1 million).

The company blamed "the absence of the FIFA World Cup, lower margins in sports, market declines in poker and the impact of EU VAT in certain markets." So pretty much everything's in the toilet.

The EU VAT problem bwin mentions is a big issue for a lot of operators. Previously VAT was charged based on where the company was headquartered, in bwin's case that's Gibraltar where there is no VAT. But under the new rules, put in place at the start of the year, the tax is charged based on the location of the punter making a bet.

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Of course a company doesn't pay VAT, its customers do. But that has a knock on effect as, in the UK for example, bwin will have to charge 20% more. That could discourage business and looks like it has.

All this was well flagged by the company months ago, but it's still not good to see revenue falling. In bwin's defence, while revenue is falling the company is at least squeezing the pips - earnings before various costs were up 2% at €47.3 million (£34.5 million, $53.3 million).

The same can't be said for 888. Revenue fell 2% to $220 million (£142 million) and pre-tax profit tanked 41% to $20 million (£12.9 million). 888 also blamed the EU tax change rules and the UK point of consumption tax, which does something similar.

The results of both companies help explain why we're seeing such a huge wave of consolidation in the sector - with tax loopholes closing and, as a result, profits and revenues being squeezed, companies need scale to be able to shoulder the costs. They also need to show investors growth and the best way to do that right now is to buy it.

Ladbrokes has merged with Coral, Paddy Power is planning a tie-up with Betfair, and both 888 and GVC Holdings want to merge with bwin.party.

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bwin.party's management said in a statement today they continue to back the 888 offer, despite signs yesterday that their minds could be changed.

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