Is a Betfair float a good bet?
Peter Webb, managing director of the betting exchange software company Bet Angel, looks at the potential of Betfair following the float.
Betfair recently announced its intention to offer 10% of its common stock to the market. This is not a great amount so may demonstrate that existing large-scale shareholders are not yet keen to sell. The curious thing about its listing, however, is that it will not raise any new money. The 10% of the company that is coming onto market is stock from existing shareholders. Betfair is debt-free, has around £150m in cash or equivalents and certainly does not need the money. So why would it want to float in the first place?
Betfair has positioned the flotation as a way to legitimise the company, to assist in the development of international operations and to help incentivise key management and employees. But it is the last reason that appears the strongest; that it will provide “on-going flexibility and liquidity for existing shareholders”. Betfair has many existing shareholders within the business and an IPO would provide them with a possible exit.
But when the shares become available, will Betfair make for a good investment? The first problem will come with getting your hands on the shares. Betfair has indicated that it did not feel it was “logistically possible” to offer stock to individuals, so institutions will own the shares Betfair sell to the market. Individual investors will therefore have to pay market price for those shares and find willing sellers in the first place.
Then there is the price. Valuations for Betfair have been mooted in the £1.2-1.5bn range. At last year’s earnings, this represents a price to earnings ratio of 25. In others words, if you bought Betfair shares it would not earn enough in 25 years to pay back your investment. However, a high valuation was always likely given that there is no need to raise funds. If it needed to raise money it would pitch the valuation at a more reasonable level but, as it is, Betfair just want to get the best price possible when the business is sold.
The world’s largest betting exchange has been very successful, but the billion dollar question is whether this will continue in the future? To make a really good investment it needs to grow and growth is slowing according to its own figures. The US holds intriguing potential, but against the backdrop of overly protective regimes in overseas markets, Betfair probably is not going to experience breakneck expansion immediately. Given the valuation, and a less than clear outlook, an investment in Betfair seems, rather appropriately, like a bit of a gamble.