Business Irish

Friday 20 July 2018

Paddy Power Betfair under fire for 'not making enough mischief' as rivals raise online stakes

The huge Paddy Power-Betfair merger has not proved to be the winner shareholders were hoping for as it trails competitors, writes Gavin McLoughlin

Paddy Power Betfair boss Peter Jackson.
Paddy Power Betfair boss Peter Jackson.
Gavin McLoughlin

Gavin McLoughlin

Spare a thought for Gary McGann, who perhaps had visions of a quieter life after stepping down as Smurfit Kappa chief executive. Since leaving the cardboard box maker, McGann - one of the Irish business world's highest-profile grandees - has taken on two high-profile plc chairmanships. And they're proving to be anything but quiet.

McGann has had to find new chief executives at both Aryzta and Paddy Power Betfair in the last couple of years. Aryzta's troubles have been well publicised, but Paddy Power has had a rough time of it too with shares down around a fifth in the last year.

A poor trading update issued last Wednesday didn't help, with the company partly blaming the recent bad weather for a dip in revenue. But these bumps in the road are the kind of thing that a business with strong underlying growth can shrug off.

And that's not something that Paddy Power Betfair appears to have at the moment.

Speaking to analysts last week, recently-appointed chief executive Peter Jackson admitted the company's performance in the first quarter had been "disappointing".

Much of the company's emphasis since the merger between Paddy Power and Betfair has been on integrating the two businesses' software platforms. That slowed down product development, but now the catch-up is beginning, according to Jackson.

Paddy Power balloon. Photo: PA
Paddy Power balloon. Photo: PA

"In Europe, our focus is on returning the Paddy Power brand to growth, and I'm encouraged by the initial benefits from our improved product offering following the migration to the new [software] platform," Jackson said.

"Firstly, customer feedback points to a significant improvement in customers' perception of our new apps, particularly relating to speed and reliability. Secondly, cross-sell rates in sports and gaming have improved," he added.

Heartening though this might sound for Paddy Power Betfair (PPB) shareholders, one wonders if the IT integration process has ceded the initiative to rivals.

Greg Johnson, an equity analyst at Shore Capital in the UK, says the Irish bookie has been losing market share to SkyBet, which has no retail shops. "In fairness given the growth rate at SkyBet everyone's been losing market share to them," Johnson told the Sunday Independent.

"I don't think they're alone on that, but the Paddy Power brand has probably been hit as bad as anyone else. SkyBet are very close to Sky Sports and Sky TV and Sky TV and Sky Sports are very, very popular. It probably means they've been able to acquire customers at a lower cost than other operators have been able to do because of that relationship."

For that reason, the news that Sky (20pc owner) and private equity firm CVC Capital Partners (80pc owner) have agreed to sell the business to poker giant Stars Group is sure to have been scrutinised closely at Power Tower.

The deal should position Sky Bet well when it comes to cracking the US, where there are hopes that the gambling market is to be liberalised - the US Supreme Court is due to rule shortly on whether a law that bans gambling in most states is unconstitutional.

PPB will be hoping to make inroads in the States too. Its big markets - the UK and Australia - are mature and bookies are facing more regulatory pressure, rather than less.

In the UK, Paddy Power Betfair and its rivals are due to shortly hear whether there will be a significant tightening of rules surrounding fixed-odds betting terminals (FOBTs) - deemed by some to be so addictive that the machines have been dubbed "the crack cocaine of gambling'" The head of GVC - which has just bought Ladbrokes Coral - said earlier this year that shops would close if plans to cut the maximum FOBT stake to £2 went ahead.

In Australia, the company is set to be hit by fresh gambling taxes, but says it sees this as something of an opportunity.

"Competition remains intense and market consolidation has commenced," the company said last Wednesday. "We have reviewed our investment plans and see an opportunity to compete more aggressively to take advantage of the potential disruption to competitors. As a result we are increasing investment in promotional generosity and marketing activity."

At home in Ireland, reforms to the gambling legislation have been kicked around for half a decade. In 2013, the general scheme of a new piece of law was drawn up and this is now being re-examined. Last month, junior justice minister David Stanton told the Dail that a working group had been set up to review the matter. It is due to report in mid-to-late 2018.

One of the measures proposed in the general scheme was an outright ban on FOBTs, while as part of the updating process it looks like an independent gambling regulator will be established.

The harrowing tale of Tony O'Reilly, the postmaster who stole €1.75m from An Post to fuel his gambling addiction, has sparked fresh debate about the regulation issue. O'Reilly, with Declan Lynch of the Sunday Independent, has written a successful book about his struggle. O'Reilly does not shirk his own personal responsibility, but the bookmaking industry does not come out well.

Asked to comment on O'Reilly's case, which includes being invited by Paddy Power to the 2011 Europa League Final shortly before being caught out by An Post, the bookmaker says: "We don't discuss the details of individual accounts, past or present, but we are continually evolving our responsible gambling procedures and improving our interaction with customers who display signs of harm. There are, naturally, positive developments in our approach now from the time of this case."

Tales like O'Reilly's continue to emerge, which would seem likely to spark further regulatory pressure.

In addition to this potential headwind, Jackson has to cope with the more general struggles of the High Street. Coping with the shift to digital is proving a difficult task for many sectors. And, indeed, the requirement to grow digital is even more of a necessity when the future of the high street bookie looks bleak.

Speaking to journalists earlier this year, Jackson acknowledged that the long-term demographics were not particularly favourable for betting stores, although the company has said a number of times that it is interested in acquiring more.

He said the shops are "important social hubs" for many customers and that he believes this will remain the case "for some time". However, future closures were far from ruled out.

"It's an interesting question in terms of what happens to the High Street ... we've obviously seen a lot of that transition happen in our industry, but we know a lot of our customers like the opportunity to socialise and hang out with their mates in our stores. Whilst that continues we're very happy to provide it," Jackson said.

"We're thoughtful though, we don't have particularly long lease obligations on our estate and so if things were to change we're able to flex and manage that well."

Shore Capital analyst Greg Johnson believes the best way for the company to get back to big growth is to tackle new markets, with the US and South America the most attractive targets.

"If you look at their revenue mix now, they are very dependent on the UK and Australia... as these markets have grown and matured, there comes a point where your growth has to slow."

However, analysts at Regulus Partners, a gambling-focused strategic consultancy strike a more downbeat note. They believe Paddy Power Betfair needs more "mojo".

The company, it says, "continues to disappoint in its online performance and while there is no doubt that a number of the excuses are valid ... a combination of trying to sound positive ... and handing the strategic keys back to shareholders (via a share buyback), suggests that PPB is in danger of becoming another large gambling company.

"Playing it safe may return to high single-digit growth, but we believe a merger of this scale and latent power should be making a lot more mischief than this."

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