Analysis - What price for Betfair to go private?
After the operator rejects an 880p a share bid from CVC Partners, Tom Victor considers what Betfair's asking price might be - and who might meet it
Following a week of industry speculation, Betfair’s board yesterday opted to turn down a bid from CVC Partners which values the betting exchange operator at £912m,
The 880p a share approach has been described by analyst Nick Batram of Peel Hunt as “an interesting starting point,” however Batram raises the question of whether the private equity firm and Formula One owner is merely a “stalking horse” testing the water for interest from within the industry.
More may become clear on 7 May, when Betfair is poised to update the market on its recent trading and potentially give shareholders further reasons to question a bid which it claims “fundamentally undervalues the business”.
The key issue for Betfair is perhaps its revised growth estimates. While the third-quarter results statement of 7 March revealed flat revenues from Betfair’s core exchange product, the operator has since seen progress in Italy and Spain. Italy’s exchange bill was given the green light by the country’s finance minister late last month, while less than a week ago Spanish regulatory body La Dirección General de Ordenación del Juego (DGOJ) confirmed the impending regulation of the product following a consultation process which began earlier in the year.
Analyst Ivor Jones of Numis described developments in Spain as “further promising news in relation to the international opportunity for Betfair”, augmenting the positive developments in an Italian market where Betdaq – recently acquired by Ladbrokes – represents the only competition to make itself known. Indeed were the two countries to pool liquidity, something which lawyer Pedro López suggested in his column for May’s issue of eGR could become a reality before the end of the year, then Betfair’s prospects in regulated territories could strengthen the argument that CVC’s bid undervalues the operator.
If nothing else, shareholders may be tempted to hold out for a higher bid, with some eGaming Review sources suggesting no offer valuing the shares far south of £10 is likely to suffice. But the gap between the current offer and one that would meet management expectations may not be that large. Indeed Batram himself suggests the £912m figure might be “not too far away from a valuation that would cause management and investors cause for serious consideration”.
Of course if Batram’s “stalking horse” comments are to prove prophetic, the question remains who from within the egaming industry might be interested in meeting an as-yet-uncertain asking price? William Hill can’t be feeling too acquisitive, after only recently completing its buyout of William Hill Online, and there are few other businesses of the scale needed to complete a £1bn purchase.
One potential good fit could be Paddy Power, an operator which has taken a similar course in relation to regulated markets and one whose senior management will already be familiar with Betfair Chief executive Breon Corcoran, who spent several years with the Irish firm before moving to Hammersmith last August. Corcoran has gone a long way towards refocusing the business with the company’s footprint now firmly on the regulated side and the trimming down of a workforce which one former employee described to eGR as “maybe too top heavy in terms of number of employees”.
While the presence of a market-leading exchange offering answers the question of what Betfair has that rival operators would want, one should not ignore the fixed-odds push which the London-listed business has undergone in the last 12 months. By following last year’s UK sportsbook launch with the acquisition of various Blue Square assets earlier this month, Betfair’s offering is perhaps more complete than ever before in a product sense, potentially making it a more attractive proposition for prospective buyers from outside the industry.
Much will now depend on what emerges from the 7 May update, which comes just under a week ahead of the deadline imposed following CVC’s initial interest, and it remains to be seen whether potential suitors will be provided with any game-changing information.
While remaining ‘optimistic’, Jones recognises “It will be a challenge for Betfair to be convincing about a strategy which is so early in its implementation”. And indeed it could be the case that – as the Numis analyst suggests – “If a bid emerges for Betfair it may be because the bidder has decided that more money can be made from taking more regulatory risk than the Betfair management has chosen to do.”