UK Edition
Paddy Power Betfair shares a good bet
The merger of the Irish bookmaker Paddy Power and the betting exchange Betfair to create the world’s largest listed online gambling company was widely viewed as the most logical and value-enhancing of a spate of deals in the sector. The deal was completed at the start of February, and last week, thanks to its £8bn market value, Paddy Power Betfair, as the merged business is now called, entered the prestigious FTSE 100 index of Britain’s biggest companies.
The next catalyst for the stock is full-year results on Tuesday. Even though shares in both companies surged after the deal was announced, Questor still believes stock in the combined business has further to go.
Paddy Power Betfair
Share price: £97.00-£1.80p
Questor says BUY
1 Wave of dealmaking
The betting industry is in the midst of a shake-up. Weighed down by rising taxes, including the introduction in December 2014 of the UK’s 15pc point-of-consumption tax on online betting, and stricter regulation, gambling companies have been forced to increase their scale to absorb these new pressures.
As a result, there has been a surge in deal-making, with Ladbrokes agreeing a merger with Coral and GVC snapping up Bwin.Party, as well as Betfair’s link-up with Paddy Power. The creation of Paddy Power Betfair is regarded, both in the gambling industry and by Questor, as the canniest deal of the lot.
2 Stronger together
When the pair announced the tie-up, they highlighted that there was almost no overlap in their customers, with just 3pc of regular UK punters that bet online who place wagers with both businesses. The merged firm has enviable scale: it benefits from wide geographic diversity, with customers in more than 100 countries, and has plenty of power to invest, with the combined company generating revenues of about £1.3bn.
Furthermore, it has Betfair’s betting exchange, a unique selling point, and is maintaining the two brands, which are both popular with punters. Questor also believes that combining the businesses does not pose some of the risks presented by other mergers.
Breon Corcoran, the combined firm’s well-regarded chief executive, spent a decade working at Paddy Power before talking the helm at Betfair in 2011. Not only does he know the inner workings of Paddy Power well, but he has crafted a culture similar to the Irish bookie at the betting exchange. This should ease the integration of the companies.
3 Share price surge
Investors recognised the merits of the tie-up immediately, and both share prices leapt in the weeks following the announcement of the all-share merger. That jump ensured Paddy Power Betfair, with a market capitalisation of about £8bn, comfortably entered the FTSE 100 at last week’s quarterly index review.
But it also means some investors are cautious about its valuation: based on forecasts for 2016 profits, the combined entity is trading on a price-earnings ratio of about 33 times. Worries about the valuation were not helped by Betfair’s co-founder Edward Wray and Bernard Arnault, the French billionaire behind luxury goods business LVMH, selling down £260m Betfair shares in October.
4 Place your bets
However, Questor believes that despite the rich valuation, Paddy Power Betfair is a share investors should own. Given its scale and attractive brands, it will be one of the winners in an industry undergoing painful transformation.
The synergies from the merger are yet to be felt, the company will receive a short-term boost from football’s European Championships this summer, and results this week give Mr Corcoran the opportunity to outline some of his vision for the business. Buy.