There are a number of similarities between the Czech Sazka and OPAP, says the latter's boss Kamil Ziegler, who was sent to the debt-ridden Greece by the duo of billionaires Karel Komárek and Jiří Šmejc to bring order to the local lotto company following its privatization after the financial crisis. Komárek and Šmejc are the biggest shareholders of OPAP, as their Emma Delta Group controls about one third of the firm's shares. Things Ziegler has gone through in Greece included this year's summer crisis that restricted ATM withdrawals and caused a drop in OPAP's revenues in the third quarter for the first time the Czech entrepreneurs bought into the company.
Your move to Greece and buying into the local OPAP lottery company was risky already in 2013. Last summer has shown that the country is far from being stable. Do you consider OPAP's situation safe?Greece is still in a very turbulent state, and its economy is far from being out of the woods. Unfortunately, the country is now lacking factors that would be able to revitalize the economy in the short-term outlook. The private sector remains relatively weak. Measures proposed by the government don't provide the necessary stimuli for growth; most of them only introduce higher taxes. The entire economy and the society as a whole are going through difficult times, which have regrettably lasted since 2009. A year ago, it might have seemed that there was a light at the end of the tunnel, but Greece's problems with debt repayment this year have set the country back, and the new measures reversed the economy to a state in which it was four years ago. That, of course, can affect the condition of our business as well.
Are you afraid that Greece will leave the euro area?
That's not the main issue. The vast majority of Greeks don't want their country to leave the EU and the euro area. And people are willing to sacrifice a lot to prevent that – at least that's what surveys indicate. But we're talking about this at a time when the government and creditors have agreed to release the first two billion euros from the bailout package. It remains to be seen how things will develop.
How is it to do business in a country that is facing bankruptcy, as Greece was this year in the summer?
That was one of the most interesting but also most stressful times in my career. The government announced capital restrictions – the banks closed and ATM withdrawals were signficantly limited. It was impossible to make any domestic or foreign transfers of funds. The advantage was that people who bet must pay in cash; they can't use, for instance, a credit card. That meant that agents had cash. During the day, we collected cash from our agents and transported the money to our premises. Under normal circumstances, all funds would be transferred to an account, but it was not an option at that time. Fortunately, our team proved its strength. Money was delivered to the post office, and we opened arcades that had been closed to have premises for collecting cash. At night, cash was collected by means of safety deposit boxes. At one point, we had 18 million euros at our head office (close to a half of a billion Czech crowns). Security was tight like in Fort Knox.
Did people stop betting after measures aimed at averting the crisis were put in place?
The first two weeks were disastrous. The slump had a large impact on our business results especially in July. The situation is gradually improving, but we're far from being out of the woods. The advantage is that we more or less know what to expect. We have statistics from Cyprus where we also operate. Similar measures were implemented there in March 2013, and we could see how our revenues responded. The development is analogical in Greece. Only the recovery of Cyprus was faster.
Will the drop in revenues last a long time?
It's hard to say because nearly everything has an effect on OPAP's performance. The government will raise income tax from 26 to 29 percent, and the increase will apply retroactively to the year 2014. For instance, three weeks ago, I was wondering why the number of bets dropped so massively. My colleagues told me that on that particular weekend the deadline passed for paying the first installment of increases in property tax and in income tax, which means that all of a sudden, people simply had less money on their hands.
You say that Greece is facing tough times. Does that apply to OPAPas well?
They often say that when the going gets tough, people play lotteries more. But that's not true. In Greece, especially, the correlation between the total volume of bets and the GDP development is obvious. For example, both the GDP and lottery spendings have dropped by approximately one quarter since 2008 when OPAP's revenues reached their peak. It means that if the economy is not doing well, neither is the lottery industry. When we took over OPAP in the fall of 2013, the trend turned around, in part thanks to measures we put in place, and our revenues were continuously growing. Likewise, our margins increased from 18 to 25 percent. Now it's the first time since we bought into the company that we've recorded poorer quarterly results than before.
The financial results in the third quarter were affected by the macroeconomic conditions on the market in July. We still performed better than what was forecast by analysts, though. (Editor's note: Revenues in the third quarter dropped 16% year-over-year to 901 million euros, and net profit declined by 8.5% to 49 million euros.) Despite that, our results in the first nine months are better than the figures reported in the previous two years.
How did you put the company back on its feet in 2013?
From the six billion euros of total turnover of the regulated market in Greece, OPAP accounts for approximately 80%. But that's less than a half of the total size of the betting market because it is estimated that the illegal market is bigger than the legal one. That includes video terminals, slot machines, illegal sports betting, online poker, and more. I think that a part of the reason why our results have been so good is that we managed to redirect some money from the illegal market to OPAP. Likewise, we've innovated sports betting, modified KINO, which is our main number lottery, and, most importantly, we have been able to improve the effectiveness of our advertising costs.
You also planned to lay off as many as three quarters of employees.
I really don't know anything about such a plan. At the end, we agreed with some 400 out of 950 employees that they would leave. But then we launched new projects, and we hired new recruits. Today, we have about 750 employees. We mainly focus on hiring young qualified workers. And I must say that I've been pleasantly surprised by their qualifications and hard-working attitude.
How would you describe the efficiency of the Greek state-owned enterprise at the time you took over it?
It was certainly very low. I want to point out one paradox. I've just read that Greeks are the most hard-working nation in Europe. And I can vouch that we have many employees who work 12 and more hours a day, including weekends. But that stems from the fact that we're a private corporation and that the conditions in the public sector really are different. The problem with Greek economy is that some people just won't change no matter what you do. That's why we didn't try to change those who had been with OPAP for 25 or 30 let. Instead, we've focused on young people, including recent university graduates. The public sector is a chapter in itself. When we bought into OPAP, the company had one of the strongest collective agreements around and 35 various extra pay benefits that could increase the basic salary.
You worked at Sazka prior to joining OPAP. Can you compare the situation in these two companies?
There are certainly many similarities. I always say that reducing the operating expenses of the CEO's office by 90% at that time translated into 20 to 30 percent savings of Sazka's overall costs. Likewise, it was obvious at OPAP where cuts needed to be made. Renegotiating five key contracts alone has reduced costs by 20%. While Sazka, being one of the largest advertising clients, only negotiated discounts from list prices, OPAP was being charged extra just because it was OPAP. People who know me will understand that this was something I really enjoyed dealing with.
Information emerged last week about disputes with the government regarding more taxes on gambling in Greece.
The entire sector is overtaxed. We pay 30% lottery tax. Greece also taxes winnings in excess of 100 euros, and the tax may be as much as 20%. On top of that, we pay 29% income tax that has been repeatedly raised. Today, OPAP is by far the biggest contributor to the Greek national budget. Last year alone, we paid 570 million euros. Our agents also pay income tax. The government is naturally aware of this. But they go after the simple options and want to tax more what has already been taxed. That's also the case with a special fee of five cents per bet that is being debated at the moment. It is a well-known fact that OPAP vehemently opposes this measure. The main reason is that it won't bring the additional 200 to 400 million euros of additional revenues to state coffers the government is hoping for. According to our calculations, the benefits will be marginal if any at all. However, the taxes will have a fundamental impact on the structure of games and will reduce revenues, which will then be taxed. This is not only our opinion; renowned investment firms have come to similar conclusions. Their calculations show that the Greek government will get no more than 50 million euros in extra revenues, not 200 million.
Are you able to quantify the impact on your company?
We have made the calculations, but I don't want to disclose the results because investors are already reflecting that in their expectations – the value of our shares was dropping regardless of how the market was developing. In addition, the drop in turnover, which will happen, will have a very severe impact on agents' income. If the tax is introduced, 1,000 to 1,500 of our 4,500 agents won't survive. That translates into at least three to four thousand jobs, which are presently few and far between in Greece.
Will you take to matter to court?
According to our interpretation, there are clauses in our agreements and licenses that give us the right to compensation if the conditions change. If the fee is imposed, we will certainly claim compensation for losses. In such a case, OPAP will be forced to file a lawsuit against the government because the case would involve infringement on our rights.
Doesn't it mean that there would be too many lawsuits? You also want to sue the Greek government because of changes in the conditions for the operation of video terminals.
To use a soccer analogy, when one team unilaterally changes the laws of the game 70 minutes into a match in a way that prevents you from getting to their half of the field, you have to take action to protect yourself. For instance, the sudden change in regulation of terminals came only a few days before we launched the project. At a time when we had invested 100 million euros. Not to mention 560 million euros we paid for licenses. We now have 9,500 video terminals ready in Greece and we should have had over 260 arcades by now. But with the regulatory measures in place today, it's impossible. At the same time, we have a very generous CSR program and contribute nearly 50 million euros annually to social projects and finance 250 children's sports academies. In addition, we are funding the complete reconstruction of the two largest pediatric hospitals in Greece.
One of Emma Delta's shareholders Jiří Šmejc says that the government will lose 300 million euros in taxes by implementing the measures in question. Doesn't saying so amount to excessive pressure?
In this respect, I agree with Jiří Šmejc entirely, and it's no pressure. It's simple math. It needs to be said who is the biggest beneficiary of money paid by OPAP in Greece. It certainly is not the investors; it's the government. From every 100 euros paid in bets, some 55 euros goes to state coffers. At the end of the day, shareholders get 10 to 12 euros, and Emma Delta itself only about a third of that amount. And the government gets nothing from the illegal market. If today we had the 35,000 terminals for which we hold a license, we would be paying the government 300 million euros in taxes in 2018. It's interesting to note that the Greek government has already promised creditors that unlike in previous years, the budget will include at least 226 million euros in extra revenues from terminals. This sum has been incorporated in the draft budget for 2016. Unless changes are made, however, the government will not get this money.
You've mentioned the illegal market several times already. Is the situation really so bad?
The country is full of casinos. The way illegals operate is that on the main street in Athens, 200 meters from the Finance Ministry, you can find a fully equipped arcade with 150 slot machines. The Greek police confiscates 10 to 15 thousand machines every year. The operators and gamblers are put in jail for 24 hours and then released. In a week, the arcades reopen and it's business as usual.
The government has recently given you a license for horse race betting. Greece is currently planning further privatization projects. Are you considering some investment opportunities?
Naturally, we can see certain opportunities, and we are analyzing some of them. On other hand, considering further investments in an environment where the imposition of extra taxes depends on somebody's mood on a given day is precarious. The developments around OPAP in recent weeks give a very negative signal from the investment viewpoint. Including those who have a stake in OPAP. Spreading uncertainty among financial investors at a time when the government wants to recapitalize banks is a major disruption. It seems to me that politicians are not fully aware of the consequences of what they're doing.