Betting on Canada
Ireland's best-known bookie clears another hurdle with a winning deal, but a new online tax might prove a fence too high
Published 17/12/2011 | 05:00
Paddy Power's deal with the British Columbia Lottery Commission represents Patrick Kennedy's first move into the potentially lucrative North American betting market.
On Wednesday, quoted bookmaker Paddy Power announced that it had agreed a three-year deal from the summer of 2012 with the British Columbia Lottery Commission (BCLC).
Paddy Power will provide the BCLC, the sole legal provider of sports betting in the Canadian province, with product, pricing and risk management services.
For legal bookmakers, North America has always been the big one, a potentially huge market that has always remained tantalisingly just out of reach. In many American states and Canadian provinces, including British Columbia, off-course betting is either completely illegal or else the preserve of a state-owned monopoly.
The rise of internet gambling, which now accounts for most of Paddy Power's business, appeared to offer a way to get around these tiresome legal restrictions. Suddenly it seemed possible that an online betting operation, which could be based anywhere on the planet, could target American customers and there was nothing the law enforcement authorities could do about it.
Anyone who thought that the Feds would simply lie back and acquiesce to the proliferation of online gambling sites had another think coming. In 2006 Congress passed the draconian Unlawful Internet Gambling Enforcement Act, which among other things banned US-based banks from processing payments to and from internet gambling sites.
Then, in April of this year, the US authorities ratcheted up the legal pressure another couple of notches when they unsealed indictments against individuals who had been operating several online gambling sites that had been targeting the American market. The Feds also seized the US domain names of these websites.
Among the sites singled out for such legal attention was the Irish-based Full Tilt Poker.
Despite its early entry into the online gambling market Paddy Power and its chief executive Patrick Kennedy had the good sense not to get on the wrong side of Uncle Sam.
Despite having been in the online poker business since 2005, it has never offered its products to American punters, preferring to wait for when internet gambling was finally legalised in the United States and Canada.
In October, even before the BCLC deal was announced, Paddy Power applied for a licence to manufacture and operate gambling devices in Nevada, the American state that is home to Las Vegas and very much the centre of that country's legal gambling industry.
Will Paddy Power's softly-softly, strictly legal tactics succeed where those of its less scrupulous rivals failed? Will its strict adherence to the spirit as well as the letter of the law eventually result in it hitting the American jackpot?
Of course it helps that, unlike the online poker sites that had been illegally targeting the US market, Paddy Power has a wide range of other gambling businesses.
The firm was originally founded in 1988 by Stewart Kenny, who had sold his retail betting shops to the UK chain Coral.
Instead of retiring on the proceeds of the sale, Mr Kenny immediately opened a new set of shops, much to the chagrin of Coral, which didn't seem to realise that, unlike in the UK where the number of bookies' shops was tightly controlled, virtually anyone can open a bookie's in Ireland.
Unlike Mr Kenny, a lifelong bookie who served as Paddy Power chief executive until 2002 and is still a non-executive director of the company, Mr Kennedy doesn't come from a bookmaking background.
The son of former Aer Lingus chief executive David Kennedy, Mr Kennedy seemed destined for a conventional business career.
After attending the über-posh Jesuit Gonzaga College, Mr Kennedy studied for a commerce degree at UCD before going on to qualify as a chartered accountant with KPMG. Then it was off to international management consultants McKinsey before being appointed director of business development at Greencore in 2002 at the age of just 33.
His job at Greencore was to manage the integration of its Hazlewood Food acquisition. Hazlewood had no fewer than 36 different businesses of which Greencore wished to retain only 13. It fell on Mr Kennedy's shoulders to close or find buyers for the Hazlewood businesses that Greencore did not wish to keep.
His success in the business development role quickly earned him promotion to being Greencore's finance director, where he was widely seen as the heir-apparent to the then Greencore chief executive David Dilger.
Except that things didn't quite work out as expected. Not alone was Mr Dilger's departure from Greencore delayed, Mr Kennedy had been appointed a non-executive director of Paddy Power in March 2004.
The relationship between Mr Kennedy, a lifelong punter and self-confessed sports nut, and Paddy Power quickly turned to true love and when John O'Reilly announced his retirement as chief executive the following year, Mr Kennedy was the obvious choice to succeed him.
It may have been an unconventional appointment but it is hard to argue with the results. Paddy Power's pre-tax profits have more than trebled from €31m in 2005 to €104m in 2010.
Since Mr Kennedy took full control of Paddy Power at the beginning of 2006, the share price has more than tripled in value to €40, outperforming the ISEQ index of non-financial shares by more than 300pc in the process.
The company now has a market value of almost €2bn, placing it comfortably among the top 10 most valuable companies whose shares are traded on the Irish Stock Exchange.
Under his leadership, Paddy Power had gradually reduced its dependence on its chain of Irish retail betting shops. In the first half of 2011, its Irish retail operations generated just 21pc of all money staked by customers and a mere 9pc of operating (pre-interest) profits.
By comparison, Paddy Power's online and telephone betting operations are now responsible for a towering 70pc of all money staked by customers and an even higher 83pc of operating profits.
In a very real sense, Paddy Power is now an online company, arguably the most successful Irish-owned internet operation, with a legacy Irish and UK retail business tacked on.
The decisive moment in the evolution of Paddy Power from a traditional spit-and-sawdust chain of retail bookies into a modern online betting giant came in 2009 when it acquired 51pc, since increased to 100pc, of the Australian online betting business Sportsbet. Sportsbet on its own now accounts for almost 30pc of the bets placed with Paddy Power and 17pc of its operating profits.
With Paddy Power's pre-tax profits set to rise by approximately 20pc this year to well over €120m, what can possibly halt its rise and rise?
The rise of legal internet gambling, has hit national exchequers including our own, which have traditionally relied on betting duties as a handy source of revenue, hard.
In his Budget speech Michael Noonan pledged to extend the 1pc betting duty to online betting. There has also been speculation that the Irish Government might double betting duty to 2pc and introduce a new tax on winnings.
If the Government delivers on its Budget promises to extend betting duty to online gambling, will Paddy Power follow through on its threat to relocate its online betting operations to a tax-free location such as Gibraltar or the Isle of Man? If it does, Mr Kennedy's well-cultivated 'man-of-the-people' image could be one of the first casualties.