Credit to Peter Jackson, the Paddy Power Betfair chief executive. He took charge of the FTSE 100 bookmaker only in January, yet the former Worldpay executive looked every inch a betting industry thoroughbred yesterday when he became the first big operator out of the stalls in the race to take advantage of the opening up of sports betting in America.
Only two days after a ruling by the US Supreme Court, which effectively removed the federal ban on sports betting, Paddy Power Betfair became the first big foreign betting group to show its hand.
The company said that it was in talks with Fanduel, the online fantasy sports operator,about “a potential combination of the group’s US business and Fanduel to create a combined business to target the prospective US sports betting market”. Its shares rose by 6.3 per cent to £82.50.
The terms have not been disclosed, although it is understood that the Anglo-Irish bookie is discussing the acquisition of a stake of more than 50 per cent in Fanduel in a deal valuing the American company at about $1 billion. With talks coming to fruition next week, the odds of it happening look good.
The company’s existing US presence includes TVG, a parimutuel horse racing betting network, and an online casino and horse betting exchange in New Jersey operating under the Betfair brand. It also has a smaller fantasy sports business, Draft, which it bought last year.
Buying Fanduel could prove a clever move (although the $1 billion price tag for a business that makes no money looks punchy). Fanduel’s existing fantasy sports business is not the attraction. Rather, it is the access to a database of six million registered users, a million of them active, and the ability to convert them from fantasy sports to sports betting. As well as this, it brings a brand with a strong presence in the sports arena, which could be scaled up using the Betfair technology on mobile.
Despite the exuberant reaction to Monday’s US Supreme Court judgment, with shares soaring across the sector, it is not a ruling that will deliver immediate gratification to operators in Britain. The predicted $150 billion annual wagering bonanza will take years to pay out because each state goes about opening up the market differently, and the big unknown is how they will approach online betting.
There is also the question of the response of the American gambling firms. As one gambling expert put it: “If British bookies think the incumbent players are going to roll over and allow Johnny Foreigner to wade in and snatch the prize, they could be in for a shock.”
William Hill’s presence in Nevada, where it has 108 sport betting kiosks in casinos and bars, will help, while GVC has the advantage of owning proprietary technology. Other listed companies with a presence include 888 Holdings and Sportech, but taking advantage of the Supreme Court ruling will require significant investment.
All eyes now will be on the big casino operators such as MGM and Caesars Entertainment, to see how they respond. Some analysts believe that William Hill and GVC could be swallowed by one of them.
Mr Jackson may have given Paddy Power Betfair an advantage in the US, but its issues at home remain. The £500 million cash return announced two weeks ago was well received by shareholders, but obstacles, such as the imminent decision by the UK government on fixed-odds betting terminals, remain. A cut from £100 to £2 could hurt the Fanduel talks and Mr Jackson could be left back in the starting stalls.
ADVICE Buy
WHY The short-term picture may be choppy, but Paddy Power Betfair has grabbed an early lead and looks likely to prove a stayer
Centrica
Iain Conn is fighting to persuade investors that he can turn restore the fortunes of Centrica (Emily Gosden writes). It’s a tough task: shares in the owner of British Gas have halved since he took the helm in 2015.
Mr Conn survived one battle on Monday, securing re-election from 99 per cent of shareholders after taking a pay cut. Yet there’s a long way to go to win the war, as analysts at Morgan Stanley indicated yesterday when they downgraded Centrica to “sell”, citing “pressure from all sides” and sending its shares down 5 per cent.
Mr Conn’s strategy is to focus Centrica on its “customer-facing” business, that is British Gas, the UK’s biggest household supplier, and Direct Energy, its US sibling. Its core income comes from selling gas and electricity, but it also has a services business, offering things such as boiler repairs. New products and services are the key to its growth plans: offering energy management to businesses and “connected home” smart energy devices to households.
Centrica still has interests in nuclear and hydrocarbons, but the former is earmarked for sale and the latter has been hived off into a joint venture with a view to an IPO.
Morgan Stanley’s concerns are fourfold, and Tempus shares them.
First, the British Gas supply unit is under continued threat from the government’s energy price cap and competition. It has been offsetting the continued loss of customers via higher profit margins, but the cap should put paid to that.
Second, it is facing tough competition in the United States and there is little reason to see this abating.
Third, its growth plans look ambitious, at best. Centrica aims for its “connected home” division to generate £1 billion of revenues by 2022, from only £42 million last year. That requires heroic growth by any standards. Fourth: all of this calls into question its ability to maintain the dividend in the medium term, much as Mr Conn insists it is safe for 2018.
Tempus suggested avoiding the shares when they were at 206p last April and again at 139p in November. Yesterday they closed just short of 141p. Even adjusting for the fact they are trading ex-dividend, victory for Mr Conn is not nearly in sight.
ADVICE Avoid
WHY Core business is under threat; growth is a challenge
