Analysis: Failure of CVC bid shows Betfair's board's faith in fixed-odds

After rejecting three bids from Formula 1 owner CVC Partners, Betfair reached an impasse with its potential suitors and called an end to discussions late on Monday evening. “It became clear that it would not be possible to agree the terms of any proposal in conjunction with a business plan that was deliverable,” the operator claimed.

However despite early reports that the price was the primary sticking point – with CVC’s “full and final” 950p a share offer falling short of the 1000p regularly cited by analysts – suggestions have since emerged that grounds for the rejection may have been strategic as much as financial.

“CVC indicated a higher offer was possible, but in order to justify the price it would appear the private equity group wanted management to follow a slightly different strategy,” Nick Batram, analyst with Peel Hunt, said in a note yesterday.

Reports in The Times make reference to alleged proposals from Richard Koch, one of the Betfair investors contacted by CVC in last month’s early stage discussions, the operator should change its focus to the 200,000 largest customers on its core exchange offering at the expense of smaller punters. This seems to be at odds with the changes implemented by chief executive Breon Corcoran, in rolling out a fixed-odds sportsbook in May 2012 and looking at international expansion.

And the decision to reject the bid certainly implies a vote of confidence in Corcoran’s strategy. He has argued that the sportsbook and exchange offerings are complimentary, revealing last week that 24% of football customers placing bets through both, and the fixed-odds launch has begun strongly, posting revenues of £7.5m for the first quarter of the year. This comes even before 120,000 additional customers were added through the acquisition of Blue Square Bet in April.

Chairman Gerald Corbett spoke this week of the “confidence” of Betfair’s board in “the continued delivery of this strategy and the Company’s outlook and growth prospects. “Under the new direction of Breon Corcoran and his management team the Board believes that Betfair is making excellent progress in the implementation of its strategy with momentum building from early success,” Corbett added.

Analysts have expressed satisfaction CVC’s interest had forced the operator to reveal more about the business’ performance. “Ultimately, investors should thank CVC as the approach has forced Betfair to greater engagement with the market, providing more strategic detail,” Batram said. The operator’s post-close update detailed scope for “targeted acquisitions,” with Corcoran making reference to “significant international opportunity” in the US, Spain and Italy.

However even without these international opportunities, analyst Simon French of Panmure Gordon says there is plenty to be positive about. “We think Spain & Italy could be sizeable ring-fenced exchange markets in their own right whilst California and to a lesser extent New Jersey provide significant optionality,” French said yesterday, however his firm’s ‘Buy’ recommendation did not include forecasts around potential exchange launches in these jurisdictions.

Analyst James Wheatcroft of Jefferies also issued a ‘Buy’ recommendation on Betfair’s shares, saying “We believe that the process has highlighted the value in Betfair and do not expect share price to fall back pre-bid levels”.

Since floating in October 2010 at £13 a share, the operator saw the share price cut in half at its lowest ebb (it fell to a low of 567p in August 2011). However it has since recovered, climbing above £8 a share in the days after CVC’s initial interest and staying above that benchmark ever since.

At the time of writing Betfair’s share price is 865p, putting the firm’s market cap at £885.45m. And with the existing strategy receiving such a glowing reception from inside and outside the company, perhaps Betfair feels it has no reason to rush to impose any changes.