Wednesday 23 October 2019

Richard Curran: 'Is someone preparing to have a flutter on Paddy Power owner?'

Flutter issued a statement clarifying that it knows of no material reason why its share price would have shot up like that. Stock photo
Flutter issued a statement clarifying that it knows of no material reason why its share price would have shot up like that. Stock photo
Richard Curran

Richard Curran

The large spike in the share price of Paddy Power owner Flutter Entertainment during the week remains something of a mystery. The company's shares shot up by 22pc in Dublin. All that could be said of the price rise was that it came on the back of some speculation that the company could be taken over and possibly taken private, implying the prospective interested party was not a listed firm. Then came the suggestion that the price rise was due to an overall sense that further consolidation in the sector is on the way.

There may well be further consolidation, especially when you see William Hill having to close nearly one third of its 2,300 betting shops in the UK, in a move that will put 4,500 jobs at risk.

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Equally, GVC, the owner of Ladbrokes Coral, has seen its share price tumble by 25pc in the past year. But few are really expecting Flutter to move on either of those firms. William Hill looks ripe for the taking but it might not yield the online benefits Flutter would look for.

Flutter has indicated it has a set of priorities which include further 'podium-position' acquisitions in the European market. Earlier this year, it bought a controlling stake in a Georgian betting business for €111m.

Even if Flutter were to make a move on another UK player, would such an acquisition or merger justify a 22pc spike in its share price? Hardly.

The other explanation is that it was some kind of market error or a blip. Yet the volume of shares traded was three times the daily average for the previous three months. And it held much of the gains into Thursday.

Flutter issued a statement clarifying that it knows of no material reason why its share price would have shot up like that.

This is the company's way of saying that it isn't talking to anyone about a buyout or hasn't received any kind of approach.

Perhaps it is too early. If someone were to buy out the business, they would need very deep pockets, given that its market capitalisation is currently about £5.4bn (€6bn).

Who would have that kind of money? Perhaps it could be an Asian investor who is already a big player in the sector. Bear in mind that while gambling is not allowed in mainland China, the casino business in Macau is multiples the size of Las Vegas. China also has a new casino; it is called the Philippines. Thousands of Chinese are betting millions online through Philippines-registered betting companies. Gambling revenues in the Philippines are set to hit $4bn (€3.5bn) this year, up from $1bn in 2016.

Thousands of Chinese Mandarin speakers have moved to the Philippines to work for businesses catering for the growing number of Chinese tourists.

Perhaps Flutter's share price gain can be explained by an American company that sees a lot of value in its future play in the US betting market, which is opening up.

Perhaps the whole thing was a share punt on the idea that some big political or regulatory news is coming down the tracks in the US, which will accelerate the company's access to lucrative states.

There is another way of looking at it, of course. The spike brought Flutter's share price back up to £72.90. A year ago, it was trading at £84.90. The fall in the past 12 months has been driven by weakening sentiment in the sector towards the impact that growing regulation is likely to have in several countries, not least the UK and Australia. It may be that, for once, Paddy Power doesn't have a surprise trick up its sleeve, but in fact somebody else does.

O'Brien looks on as Wall St soars

One person who would have watched Wall Street's record-high closing on Wednesday was Denis O'Brien.

The Digicel owner was reported to be checking out equity funding options in Australia, after reporting a further tightening on the telecommunications group's underlying earnings performance in the quarter to March 2019. Earnings fell another 9pc to $230m and have now dropped from $281m in the same quarter two years ago.

O'Brien decided to pull his Digicel IPO in New York in October 2015, when he felt the market was undervaluing the business.

He asked on CNBC shortly afterwards why you would sell your front garden for a price that you felt was less than it was worth.

Since the IPO was pulled, Digicel has battled weakening currencies in some of its markets, greater competition, the need to invest heavily in infrastructure, and sorting out some of its $6.7bn debt.

When you look at its results for the three months to March 2019, several of the metrics look good. Underlying revenues were up. Revenue per customer was up. The company has responded to financial challenges by taking on a major cost-cutting programme and it is investing heavily.

The problem remains about how it reduces that debt burden. Its debt-to-ebitda ratio looks like heading towards seven times next year. This is a high figure, which will impact the performance of its bonds. In the year to March 2015, before the pulled IPO, its debt was $6.5bn and ebitda was $1.2bn.

It is difficult to say how the shares would have performed if O'Brien had taken the leap and gone ahead with the 2015 flotation.

For example, the IPO would have reduced his equity holding in the company to 60pc, while he planned to retain 94pc of the voting rights.

Investors would not have relished that particular structure, but once the shares had got away, the fundraising would have bolstered the balance sheet and the proceeds could have been used for debt reduction and equity-funded capital expenditure.

The Dow Jones index has climbed 57pc since October 2015 to its record high of 26,966 points last Wednesday.

One option for Digicel is to sell down assets. The problem with disposals is while they bring in cash to reduce debt, they also reduce revenues for the remaining group.

O'Brien has built up Digicel from scratch to a multi-billion-dollar business, operating in 30 different markets.

He won't like the idea of selling anything which represents a point of shrinkage in the business.

But he may wonder about that late decision not to go ahead back in 2015.

Sharing the losses from Irish Nationwide loans

More allegations got a public airing at the Central Bank inquiry into Irish Nationwide Building Society. Some of the stuff was pretty appalling.

The inquiry suggested that some big borrowers were effectively given a green light for massive loans before submitting the formal loan application.

It was also suggested that up to €6bn of INBS commercial property loans had a profit share element to them.

Developers could borrow 100pc loans of tens of millions on property plays with all of the interest and loan repayments deferred until the project was complete.

INBS was in for 40pc of the profits afterwards. And yet this was supposed to be a building society.

The obvious question that needs to be put in all of this shocking stuff is where was the Central Bank?

Surely all of this information could have been established by asking a few pertinent questions, seeking a few loan files and taking a tough stance.

The financial regulator did express its dissatisfaction with many aspects of how INBS was run and operated, but just didn't follow through hard enough.

The bill from the collapse of INBS was €5.4bn. However, this does not include any financial return from the sale of its assets mainly through Nama.

While Nama is happy to tell us how much it expects to make in total from its loan portfolio, it has not provided a breakdown of the final cost per financial institution.

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