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Paddy Power founders hit jackpot with cash payout

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David Power, co-founder of Paddy Power

David Power, co-founder of Paddy Power

David Power, co-founder of Paddy Power

It really was a tale of two bookies this week. Ladbrokes, believed to be losing around €3m a year on its Irish betting shop operation, is reviewing its business in Ireland. The British group closed 20 betting shops here in 2014. A lot more could go.

But it was a case of "winner alright, winner alright" when an unstoppable Paddy Power group announced another set of stellar results. The group earned €882m on €7bn of bets. Irish retail and online operations are estimated to account for around 24pc of the business by Goodbody Stockbrokers.

As more small independent betting firms and even bigger chains shut shops, Paddy Power is still increasing shop numbers here. The betting shop market is consolidating, with Paddy Power owning 243 shops and growing. The listed group has around a quarter of all betting shops in Ireland and an even bigger market share. Boylesports has over 200 and has also been expanding.

Small independents accounted for around 60pc of the market in 2008 but that has collapsed to around 34pc. Irish betting shops only account for about 10pc of Paddy Power group profits now. Further consolidation will see a massive carve up of the market by the big two. In ten years from now, those two could be the only ones standing.

Paddy Power chief executive Andy McCue hasn't wasted any time taking stock of the where the betting and gaming giant needs to be. Focus on making what it has work well, move away from carrying unnecessary surplus cash, and hand back a staggering €392m to shareholders.

Of course Mr McCue emphasised how this new debt/cash mix would not hamper the group's ability to grow, but in reality it sends a signal that he doesn't plan to buy anything much in a hurry.

He doesn't need to. Australia has been a spectacular success. The Irish and UK retail operations continue to grow. Overall online operations are performing very strongly.

Italy is probably the big disappointment of the whole lot. The group doesn't expect to make a profit there until 2016 and according to Goodbody Stockbrokers, some industry publications there suggest Paddy Power has been losing market share.

The return of €392m to shareholders means a nice payout to his predecessor Patrick Kennedy. The last chief executive's 473,000 shares are currently valued at €35.3m. His payback from the return of cash will be €3.7m, while still bagging a dividend of €718,000 for last year.

But co-founders of the group, David Power and John Corcoran, don't just have winning slips, they have an accumulator.

Power's shares in the group are now valued at €287m and he will bag €30.5m from the cash distribution. He will also have received a total dividend for 2013 and 2014 of another €10.9m. That is €41.4m in cash in two years - without selling a share!

Corcoran's stock is worth €112m and his share of the cash distribution will be worth €11.7m. Stewart Kenny's remaining shares are still worth a tidy €29.7m.

It is money all round - except for the Exchequer as far as betting tax goes. At 1pc, it remains one of the lowest in the world. Betting is also Vat free. Nudging up the rate would only destroy low-margin smaller bookmakers, according to some commentators.

It would also drive more business into the arms of unscrupulous offshore online operators, who might not pay the tax at all.

On-line gambling still isn't taxed although that is expected to change later this year. The UK has increased betting taxes and continues to squeeze gambling firms, yet Paddy Power is still expanding and growing profits there. Surely that is food for thought for Michael Noonan.

 

QE will be the equity investors' punch bowl

Tomorrow is QE day. European Central Bank head Mario Draghi will crank up the printing presses (well, not quite) and start creating money.

Global stock markets have been gearing up in advance of the move with European bourses firing ahead. The FTSE 100 is hovering around all-time highs, having recently beaten its 15-year dotcom record level. Quantitative Easing is the punch bowl they actually don't need.

Even in the US - where encouraging economic data and an expectation that some of this new euro money will make it to Wall Street have pushed stocks ever higher.

Analysts say that shaking off the previous dotcom era highs is very welcome - because the likes of the Nasdaq is now grounded in real tech profits.

The mantra is that the fundamentals are sound and the wash of cheap money generated by quantitative easing in the US, the UK and now the eurozone is just a little icing on the cake.

If that were the case, then how come companies in the US are buying more of their own stock than ever before?

Since 2009, S&P 500 companies have bought back $2trn of their own shares. Companies are on track to spend 95pc of their earnings on buybacks and dividends.

This implies there is an artificiality about it all that cannot last and should end in tears.

However, the artificiality looks set to continue. It will increase when Draghi and the boys start buying up €60bn worth of bonds per month.

So what about our own modest stock market index and its performance? The Iseq index is powering ahead at 6,017 but remains well shy of the complete fantasy levels of 2007, when it peaked at 9,854. Today the index is back up to where it was in May 2008 - remember then, the month when Brian Cowen became Taoiseach?

It hit its low point of 2,074 in February 2009. If you bought the index back then you are up around 190pc. A pretty nice return. If only I'd known then what I know now.

 

Momentum is now behind IAG in battle for Aer Lingus

The mood music points towards a deal being struck between IAG's Willie Walsh and the Government. If the atmosphere has changed, then all Walsh has to do is come up with something that allows politicians to say this is a better deal.

It will be easier to work out a solution on connectivity to Cork and Shannon, albeit not a permanent one.

Placating some trade union leaders about job cuts could be trickier. Walsh can't give too many guarantees on jobs because it could undermine the commercial rationale for doing the deal in the first place.

Unions want commitments on voluntary redundancies instead of compulsory job losses, and guarantees around maintaining work agreements.

Walsh went to war with Iberia back in 2013 and took on its 18,500 staff who had several strikes. The Spanish airline was losing €3m per day. Yet Walsh ended up reducing the headcount by just 15pc through a voluntary programme.

Aer Lingus is profitable and a lot leaner than Iberia was. A 15pc job cull at Aer Lingus seems unnecessary and unlikely. If it happened it would mean around 600 job losses. Something closer to 200, I would imagine, is more likely if this deal goes ahead.

Perhaps it has taken politicians all this time to realise Walsh's offer is not only pretty good, it is the only offer.  

 

rcurran@independent.ie

Sunday Indo Business