Is Betfair ex-growth?

Posted by Neil Humeon Jun 29 09:35.

There’s a distinct lack of ambition at Betfair.

The online betting exchange has on Wednesday announced plans to start a share buyback, barely nine months after listing:

Betfair Group plc (“Betfair” or “the Company”) (LSE:BET), the world’s biggest betting community and one of the world’s leading online betting and gaming operators, today announces that it intends to commence a share buy-back programme to make market purchases of up to £50 million of its ordinary shares (“Ordinary Shares”) over the next 12 months.

Outgoing CEO David Yu says the buyback is part of a plan to deliver long-term shareholder value through “a combination of accelerating our revenue growth, driving further margin improvement and returning excess cash to shareholders”.

Anyway, it’s true that Betfair is a highly cash-generative business which did return £112m to investors in 2008. But this is hardly the plan sketched out at the time of flotation last October.

Back then the talk was of growth and expansion into new markets. Buybacks didn’t get a mention.

From the Betfair IPO prospectus:

Growth strategy
The Directors believe that Betfair has multiple opportunities to secure future growth in both the short and the long-term through:

a continuing focus on extending Betfair’s leadership in sports betting, which is the largest segment of online gaming with high levels of forecast growth;

• further expanding Betfair’s portfolio of products and cross-selling these products to Betfair’s loyal customer base in order to maximise customers’ lifetime value;

• taking advantage of the proliferation and convergence of new channels such as mobile, social media platforms, interactive television and its API;

• geographic expansion—both in the near term in Betfair’s core European and Australian markets, and in the longer term through the possibility of liberalisation of large markets such as the USA, India and China; and

• developing Betfair’s technology platform to address new markets and/or new verticals, as Betfair already is seeking to do in the financial markets with LMAX

So is the share buyback in fact a sop to shareholders who have seen the value of their investment fall by 40 per cent since flotation?

Possibly.

But it’s also an admission that Betfair’s efforts to address new markets have failed — LMAX, the financial markets spin-off has, for example, flopped — and its overseas ambitions are being thwarted by regulators.

This, at least, is something the company recognises.

From Tuesday’s maiden annual results statement.

In the short term, there will inevitably be challenges as we aim to bring our disruptive, consumer-friendly technology to new markets. We recognise that we could need to adapt our product in the short term to comply with regulation in jurisdictions that may look to restrict exchange betting in the first phase of licensing. The development of our integrated Exchange and sportsbook product will give us additional flexibility to react to changing regulatory requirements.

A wide variety of European countries are currently taking political and legislative steps to implement online gaming regulation for the first time. They include Cyprus, Denmark, Germany, Greece, Ireland and Spain. The process is at a different stage of development in each country but is likely to result in online gaming legislation being implemented in the next six to 24 months. It is currently difficult to say what the final regulatory framework in each country will look like: there may be significant variation between countries in the products that can be licensed and the taxation structures to be applied

But to look at things from another perspective, here’s Paul Leyland of Investec Securities:

While we see the £50m share buy-back as an accretive use of cash, we do not believe it is the action of a growth company with lots of M&A potential. Equally, once over, it will reduce the potential cash on the balance sheet for valuation (or even operational) support.

That’s not what shareholders signed up to when they backed the flotation at £13 a share, and also not what the tarnished UK IPO market needs right now.

Related links:
David Yu to step down as Betfair chief – FT

This entry was posted by Neil Hume on Wednesday, June 29th, 2011 at 9:35 and is filed under Capital markets, M&A. Tagged with , , .

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