The Paddy Power-Betfair merger: why now?
Management at both companies see scale as the way to grow in an industry that is in flux, writes Gavin McLoughlin
Betfair boss Breon Corcoran and Paddy Power go back a long way.
The Mullingar native worked there for ten years, rising to the post of chief operations officer before he left in 2011.
He was former Paddy Power boss Patrick Kennedy's number two - and together the pair were seen as two of Ireland's hottest young executives.
Then Corcoran, who had overseen much of the bookie's online development, was gone. Three years later Kennedy announced his own departure, paving the way for Scotsman Andy McCue to take over at the top at the beginning of this year.
McCue had worked mainly on the retail end of things. He joined Paddy Power in 2006 as head of strategy for UK retail, then took on the managing director role of that arm of the business, before bringing Irish retail into his empire after Corcoran left. But now he has been persuaded to step down as boss - becoming chief operating officer of the most recognisable bookmaker in these islands in favour of his former superior. Why?
At a press conference at the company's south Dublin headquarters - nicknamed the 'Power Tower' - McCue came over all humble. It was like watching a star footballer claiming his success was really all down to the team.
"I'm very comfortable with that decision. I think this is a great strategic move for the Paddy Power business... I personally am delighted with the deal and am delighted to be the chief operating officer in the new combined group."
Cormac McCarthy, the former Ulster Bank chief executive who is currently Paddy Power's chief financial officer, will be bidding farewell to the company, but he backed the deal in a big way too. He even trotted out the 'it's not about me, it's about the company' line.
Most analysts have welcomed the move. The industry is in something of a regulatory flux at the moment. A new point of consumption tax introduced in the UK has put pressure on margins. In this country a new online betting tax has been introduced.
One way to drive margins back up is to make the cost savings that can be derived from a merger.
"There is massive consolidation in the sector as a result of the point of consumption tax coming in at the back end of last year. You only have to look back at the deals that have been going on. William Hill tried to take 888 out, and then you've got Ladbrokes and Gala Coral merging together, you've got BWin up for sale with GVC and 888 kind of fighting over that one," Sophie Blandford, an equity analyst at Daniel Stewart & Co, told the Sunday Independent.
"So you've got margin pressure from the introduction of this tax, and you've also got changes to the fixed-odds betting terminals that came in March this year. You've got two tax changes that have moved people towards looking at maintaining their margins, and ultimately looking to get bigger and more scaleable - trying to take out some costs and benefit from both cost and revenue synergies.
"From a strategic point of view it makes sense for Paddy Power to go along with Betfair. They have got complimentary products, they have also got geographic diversification as well. Betfair get access to a retail presence that they have not had before."
The results Paddy Power posted last week were strong - but this time last year it was announcing a 14pc reduction in first-half operating profits on the back of adverse sporting results. Even aside from regulatory changes, it operates in a volatile sector. Scaling up will give both companies more strength, and will also provide them with a foothold in markets where they do not currently operate. Paddy Power will get a presence in the US, while Betfair will move into retail.
BDO Ireland managing partner Michael Costello, whose company has a specialist team for the sector, told the Sunday Independent that "the market has reached saturation point and merger activity is increasing. However this deal might be considered unique in one particular way, in that it brings together the sophistication of the Betfair customer base with the more recreational player that sits within the Paddy Power stable.
"Another advantage is that the enlarged group is to benefit from a leader who understands both businesses intimately.
"As with any merger there are complications: the potential different brand positions - with Paddy Power being far more of a challenger brand and Betfair only recently moving away from its more conservative base. But they come together with distinct customer bases. If these can be worked through, this should be seen as a great opportunity.
"If management successfully deliver unification of the two businesses, can continue to strive and deliver product development - a must for the customers of today - then this merger may well result in significant growth rewards."
Nomura analyst Richard Stuber said the key motivating factor to the deal is scale, in a note circulated earlier this week.
"Together, the company will have the number one online market share in Australia, in Ireland and US horseracing. We think the key revenue synergy is likely to be the marketing reach of combining Paddy Power's sportsbook with Betfair's exchange.
"Unlike Ladbrokes-Coral for which we think the planned merger is 'defensive', this proposed merger comes from both companies performing strongly in the fast-growing online market.
"We see material cost savings, and given the importance of Betfair's core exchange, less potential revenue attrition than two 'recreational' brands."
The move will also allow the companies to bang heads together when it comes to new technology. The way people gamble has changed dramatically - and Paddy Power is shortly bringing out two new apps to reflect that. McCue said the new apps would be easier to use.
He recently announced that Paddy Power was dropping its Facebook betting product Paddy Power In-Play, a mobile casino app, and a betting challenge that it previously said was "revolutionising the way people bet on sports". He won't want to do that again.
Cormac Barry, chief executive of Paddy Power's Sportsbet business in Australia, was present at the conference and McCue pointed to him as the company's expert on the technological benefits of a combination.
"As with all e-commerce businesses I think online betting and gaming is getting more and more global," Barry told reporters. "In the example of Paddy Power and Sportsbet, we were able to combine the best developments of both businesses. So there were benefits in both directions.
"That can work at a greater scale, multiplied numerous times, in a merged entity with Betfair. We will have a much greater pool of talent, a much greater depth of technology and understanding - and over time I think e-commerce and wagering and gaming will get more and more sophisticated.
"You will see very personalised offers and money-back specials and so on. I think the industry just gets more complex at the back end and more simple, more one-to-one at the front end.
"I think the industry is in an early stage of evolution - and one of the reasons that this deal is compelling is that the operators will have that depth of scale and the ability to invest in the technology.
"It's a combination of technology, operational know-how, data, all sorts of things combined to create the best possible offer to the customer - and ultimately the businesses that give the customer the best product will win".
One of the products Paddy Power is about to launch in Australia is Punters' Club, which is designed to allow customers to bet together with collective money, taking turns on who does the betting. Barry said many people are already doing this using spreadsheets and Paddy Power's product will aim to make the practice easier.
The problem, of course, is if that the technology targets punters and makes betting easier it also makes it easier to lose money. The merger will see less competition in bookmaking than there would otherwise have been - potentially making prices higher.
Asked if there would be more value for customers, Barry said punters want easy-to-use applications, good products, good pricing and good offers. "We're going to give them all of those things," he said.
McCue said the best way to think about these deals is to think about it from a customer's perspective. "I think there is a whole range of revenue synergies - and the more the teams talk, the more revenue opportunities we see that can add excitement to the customer's offering.
"Most of this is about growth. There will be substantial revenue synergies and substantial cost synergies deriving from this deal, but I think in many ways for two leaders in the sector to combine, it has to be a growth play."
Sunday Indo Business