Is it prime time in the City for the gambling sector?
With British business losing ground in numerous sectors, are gambling firms in the UK and Ireland still a good bet? Angus McCrone finds out.
I recall a spoof radio report a few years ago that purported to be covering UK business news from the end of the 21st century. The headline was about pizza delivery, for the simple reason that this was the only business in which the UK was still active.
Something of that feeling came over me in August when I heard of the proposed £5bn-plus merger of betting companies Paddy Power and Betfair.
Amid the remorseless acquisition of British-owned firms in more strategic industries, the UK and Ireland have retained much more than their fair share of businesses involved in gambling – whether long-established firms such as William Hill and the newly fused Ladbrokes Coral, or spread bookies such as IG Group and CMC Markets, or the new fixed-odds breed such as Betfair, Paddy Power and Bet365.
The proposal for a Betfair-Paddy Power link-up envisaged a combined entity owned 52 per cent by Paddy Power shareholders and 48 per cent by Betfair investors, with joint revenues of £1.1bn.
The behaviour of the two share prices has been striking. In the short term, the August announcement contained the usual mix of takeover-speak ("opportunity to deliver synergies, customer benefits and shareholder value"), and the prospect of this was enough to lift shares in both firms on that day by roughly 20 per cent.
Some investors may have focused on cost-cutting potential, with the two companies employing some 7,000 people between them, and having separate stock market listings and computer systems. But scope for cost-cutting will be limited by their different characteristics: Betfair grew up as an online betting exchange, enabling punters to bet against each other, Paddy Power cut its teeth as a manager of High Street betting shops as well as telephone and Internet bookmaking.
One concern might be that whenever the gambling industry prospers, governments get tempted to tighten regulation or raise taxes.
Other investors may have focused on what Breon Corcoran, the chief executive of Betfair and, until 2012, boss of Paddy Power, might be able to do by combining two businesses he knows well, or on the possibility of a counter-bid for one or other firm.
Share prices were already racing before the merger announcement. In the 12 months up to the day before it was revealed, Betfair shares almost doubled and Paddy Power stock zoomed up by around 50 per cent, while the FTSE 100 index went sideways, at best. Ironically, for a long time after its flotation in 2010, Betfair was seen in the City as an example of an initial public offering that had been priced too aggressively. By early September, shares in both Betfair and Paddy Power were on prospective price-earnings ratios of more than 30.
The rise of mobile and new client sign-ups
So why has there been such exuberance in the gambling sector?
One reason is the expanding use of mobile phones as an instrument of betting – Betfair said in June that more than 90 per cent of its revenue growth was coming from mobile, and mobile was also responsible for the bulk of its 52 per cent increase in new customers in the 2014-15 financial year.
Another reason has been a stream of events that led to new client sign-ups, from last year's World Cup to the September 2014 Scottish referendum, and this year's general election.
A third was geographical and product diversification, with Betfair and Paddy Power active in markets such as Australia, Bulgaria and parts of the US, as well as in casino gaming.
A fourth has been aggressive and imaginative marketing – Paddy Power, for instance, parking a gigantic billboard outside Westminster on the eve of the election, with the words "You're getting sacked in the morning".
Can this dynamic British Isles industry continue to forge ahead? There is no shortage of new geographical markets to address. There are big events coming up that could attract new clients, including the Rugby World Cup finishing on 31 October, the 2016 European football championship, the 2016 Olympics and the UK's EU referendum.
One concern might be that whenever the gambling industry prospers, governments get tempted to tighten regulation (such as the sudden clampdown on overseas poker websites by the US in 2006), or raise taxes (such as the Chancellor's 15 per cent impost on offshore bookmakers, announced in August 2013).
Another might be that more effective Internet-age marketing is great, but its impact could be a bit of a one-off. Once the public gets used to bookies' headline grabbing, they may cease to notice.
Angus McCrone is a freelance business journalist. This article first appeared in the October 2015 edition of CA magazine.