Stakes high for Paddy Power Betfair as Corcoran quits and doubts creep in over merger winnings
Despite departing chief's praise, a muted share price and future headwinds leave a question mark over value of betting giants' play, writes Dan White
The sudden departure of chief executive Breon Corcoran and the weakness in the share price since the Betfair merger two years ago raise questions about giant quoted bookmaker Paddy Power Betfair.
Paddy Power Betfair (PPB) was created by the 2015 merger of Irish bookie Paddy Power and UK betting exchange Betfair. At the time of the announcement in September of that year Paddy Power shareholders, who received 52pc of the shares in the enlarged company, were promised that the "greater scale" resulting from the merger would lead "to higher returns on investment across existing and new markets".
The merged company would deliver "significant cost synergies" and be "highly cash generative and [have] a strong balance sheet", according to the announcement.
So how have things turned out 24 months later? The Paddy Power Betfair share price soared in the run-up to and immediate aftermath of the merger announcement. From just over £80 as Paddy Power in late August 2015 - most trading in PPB shares takes place in London - it hit over £107 by the beginning of February 2016.
It was too good to last. Since then the PPB share price has come back down to earth with a bump and was trading at about £72.50 in London last week. Its share price has fallen by 21pc over the past year.
While the share prices of other quoted bookies have also fallen, with William Hill down 21pc and Ladbroke Coral down 18pc, it is the weakness of the PPB share price that has attracted the most attention from investors. This is because it is much bigger than either of its two main quoted competitors.
Even after the recent share price falls PPB still has a market value of £6.1bn compared to William Hill's £2.2bn and Ladbroke Coral's £2.3bn. When you are the biggest kid on the block your problems inevitably attract more attention.
Is the fall in the PPB share price and Corcoran's sudden departure an indication that the merger has failed to deliver the promised returns? Speaking to the Sunday Independent this week, the outgoing boss said he thought the integration had gone "pretty well".
"We've covered an awful lot of ground very quickly. We achieved the synergy targets very quickly, the management team is stable and motivated, we've introduced kind a new different culture and set of values for the firm that were chosen by the employees as opposed to imposed top down."
One of the major challenges has been integrating the Paddy Power and Betfair technology platforms. Analysts say this has slowed down the company's ability to roll out new, innovative digital products. According to Corcoran the work is almost done.
The company's financial performance since the merger doesn't seem to point to failure either.
Total revenue jumped 18pc to £1.55bn in 2016 while underlying operating (pre-interest) profit and earnings per share were both up by 44pc to £330m and 331p respectively (PPB reports its results in sterling).
This strong financial performance has continued into 2017. In its half-year results, which were released last week, PPB announced that total revenue had risen by a further 9pc to £827m in the six months to the end of June while operating profit was up 22pc to £180m and earnings per share increased by 23pc to 181p.
So why, with the Betfair merger seemingly delivering the goods, has Corcoran now decided to head off in search of pastures new? The departing chief executive has been with PPB and its predecessor companies man and boy. The son of John Corcoran, one of the founders of Paddy Power, he first joined Paddy Power in 2001 as head of its non-retail (online) business. He became a director in 2004 and chief operations officer in 2010.
However, in November 2011 he surprised many people when he left Paddy Power to become Betfair chief executive. The betting exchange had been going through a torrid time, with its share price down by over 40pc in the year following its 2010 flotation.
Corcoran is generally reckoned to have done a very good job at Betfair, with the value of the company jumping from just £750m at the time of his appointment to £2.4bn at the time of the Paddy Power merger less than four years later.
Maybe too good. Under the terms of the merger not alone did Corcoran become PPB chief executive, but Betfair shareholders ended up with a 48pc stake in the merged company. This was despite the fact that while Paddy Power had revenue of £746m and earnings before interest, depreciation, taxation and amortisation (Ebitda) of £173m in the 12 months to the end of June 2015, Betfair's revenue was just £477m and its Ebitda £120m for the same period.
In other words, Paddy Power agreed a merger with Betfair on terms of virtual equality despite the UK company's Ebitda being less than 70pc of Paddy Power's. Based on the comparative financial performance of the two companies prior to the merger a 60:40 split might have been more appropriate.
With the PPB share price now lower than it was before the merger announcement, former Paddy Power shareholders could be forgiven for suffering from buyer's remorse.
While Corcoran's departure came as a complete surprise to outsiders, maybe it shouldn't have. With the benefit of hindsight there may have been a number of straws in the wind. In March 2016, just weeks after the merger had been consummated, Corcoran sold 43,500 PPB shares, about a quarter of his total shareholding, for £4.16m.
Corcoran still owns just under 140,000 PPB shares, worth over £10m at the current share price. He is also listed as having options over a further 431,700 shares at strike prices of between £18 and £87. Even after the recent falls in the PPB share price, these options are collectively in the money to the tune of about £17m.
However, 104,000 of these options are conditional on his continued employment by the company so the actual value of his options now that he has announced his intention to leave is probably considerably less.
"There's never a good time to leave a great business," Corcoran said during the week.
"I've been working in this industry longer than most of us will ever be married. I do think it's an opportune time for the business given that the platform work is in its final stages and that, to all intents and purposes, we feel in the business that the merger - other than the tech work - has been done. I've committed to the board that I'll oversee the final part of this [the merger], which is the delivery of the tech project.
"I'm excited about taking on a new challenge in a different space."
While Corcoran can hardly be faulted for wanting to do something different after nearly 17 years as a bookie, he does leave PPB at a time when the company and the betting sector as a whole is facing into stronger regulatory headwinds.
Gambling is a bit like tobacco and alcohol. Given that the urge to gamble seems to be hotwired into our DNA, governments have little option choice but to tolerate it or else surrender the market to illegal, often criminal, operators.
Instead they seek to regulate and tax it. However, in recent years the rise of online and telephone betting - over 80pc of the more than £5.5bn wagered by punters with PPB in the first half went online - has left regulators struggling to catch up.
That may be about to change. In Australia, where PPB does about 30pc of its business, the federal government has strengthened the ban on in-play betting - where punters can bet on sporting events as they are taking place - and also credit betting. With in-play betting accounting for 15pc of the stakes and 8pc of revenues at its Australian business in the first half of 2016, the impact on Paddy Power has been significant.
Closer to home, the UK government is getting ready to crack down on fixed-odds betting terminals (FOBTs), of which there are more than 34,000 in the country. These accounted for 13pc of the total amount lost by punters, about £1.8bn, in 2016. Dubbed the "crack cocaine of the betting industry", most analysts now reckon that the maximum FOBT stake will be slashed from the present £100 to £20 or possibly even £10.
Betting taxes, which had been cut in response to the growth of online bookies operating from offshore tax havens, are also creeping up again. The UK introduced a new gambling tax, levied at 15pc of bookies' gross profits, in 2014. The UK betting tax is payable by all bookies, both onshore and offshore, taking bets from British residents.
Ireland introduced a 1pc tax on all bets placed by Irish residents with offshore bookies and a 15pc tax on betting exchanges' commission in August 2015.
While a return to the 1980s, when Irish betting duty was raised to 20pc, is hardly likely any time soon, gambling is likely to remain a target for cash-strapped finance ministers everywhere. The fact that the proliferation of gambling channels has led to renewed concern about gambling addiction - there are an estimated 28,000-40,000 problem gamblers in Ireland and as many as 600,000 in the UK - will allow any future betting tax increases to be dressed up as somehow protecting problem gamblers from themselves.
PPB is confident that it can ride out any regulatory storm. It points out that the Paddy Power/Betfair merger was part of a wider consolidation of the sector that also saw Ladbroke merge with its smaller rival Coral in 2015.
"There are undoubtedly headwinds and regulatory challenges. The strong will get stronger and the weak will fall away," says a spokesperson.
Sunday Indo Business