Tag Archives: BWIN

Gambling Problems

It has been about 6 months since I posted on the gambling and gaming sector (also earlier here) and there has been a lot going on. BWIN, after being on the block for some time, is closing in on a sale of its business with 888 and GCV (in conjunction with PokerStars and FullTilt owner Amaya) the speculated favourites. 888 itself rejected an offer from William Hill earlier in February this year. Meanwhile, Betfair and PaddyPower opted to return their cash piles of £200 million and €440 million respectively to shareholders rather than get involved in any M&A.

Ladbrokes, after a series of poor results, promoted the digital head Jim Mullen to CEO who is currently involved in a route and branch review of the firm with the outcome due to announced in June. His first move was to put the Irish business into examinership. Ladbrokes woes have continued with poor gambling Q1 results, continuing a run of bad luck after a disastrous boxing day football gross loss, as the exhibit below shows.

click to enlarge2014 Boxing Day 11 standard deviations

As can be seen by the graph below, Breon Corcoran’s rehabilitation of Betfair’s exchange model has resulted in an outstanding performance with a near doubling of the stock. The ex-Paddy Power executive has delivered on his plans for the betting exchange (as detailed in this post). [Update: Numis just released a note on Betfair’s rich valuation as per this article.] The tiny casino player 32Red has also had a good run due to solid 2014 results and M&A speculation.

click to enlargeShare Price 6months to May 2015 William Hill Ladbrokes Paddy Power Betfair 888 BWIN 32red

Internal candidates in William Hill and Paddy Power, James Henderson and Andy McCue respectively, also took over the CEO role.

The challenges for the sector are considerable. In the UK, the point of consumption (POC) tax of 15% has been in force in the UK since December and a new 25% rate of Machine Games Duty (MGD) applied from the 1st of March. Uncertain regulation across Europe and the lack of traction in opening of US markets are other headwinds.

Operator’s ability to reduce pay-outs to punters to counter tax increases is restricted by the competitive nature of the market, particularly online as the graph below on gross win percentages illustrates.

click to enlargeOnline Sportsbook Gross Win Percentage

Taking the commentary from the operators on the impact of increased taxes, I estimated the likely impact on net margins for a number of firms (as the graph below shows).

click to enlargeNet Margin estimates to 2015 gambling firms

The market is giving Betfair and Paddy Power credit for their recent revenue growth, strong operating results, product development and strong mobile adoption. Based upon my estimates, both trade on a 2015 PE in the low 30’s.

click to enlargeMarket valuations gambling firms

A brief review of the business profile of a selection of firms illustrates the differing models, as per the exhibits below.

click to enlargeGambling Sector Revenue Split & EBITDA estimates

click to enlargeGambling Sector Revenue Geographical Split 2015

It will be fascinating to see how the remainder of 2015 plays out for this sector. Scale is undoubting going to be a strength for firms in the future. What the large UK operators, Ladbrokes and William Hill, will do to counter headwinds will be intriguing. Although there is nothing to suggest it is remotely likely, it occurs to me that a tie-up between Paddy Power and Betfair would make a powerful combination.

Uniting Gamesters

BWIN’s on-going search to “create shareholder value” seems to be moving on with the announcement that it “has entered into preliminary discussions with a number of interested parties regarding a variety of potential business”. A previous post on a number of the main players in the European gambling sector highlighted that William Hill and Paddy Power were speculated to be potential bidders for all or parts of BWIN, a European online gaming firm with a concentration of approx 25% of revenues from Germany. Now press reports speculate the potential interested parties include the Canadian firm Amaya, who purchased PokerStars/Full Tilt earlier this year, and Playtech, a software gaming firm that are “seeking transformational M&A opportunities to take the business to the next level”.

Commentators raised an eyebrow about the speculated 45% premium on offer (from before discussions were reported) given BWIN’s operating metrics and the uncertainty over the key German market. Speculation involving Playtech focussed on their recent debt raising which brings their cash-pile to around €700 million. Playtech’s shareholders may not be too pleased if their new strategy moves too far away from the very profitable software business, particularly considering the alternative of continuing with their generous special dividends. Taking on businesses such as BWIN, or even another speculated target like Ladbrokes, is a far cry from what made Playtech such a star.

In fact, the best performer in the sector (in fact the only name that’s in positive territory!) is the reinvigorated Betfair under Breon Corcoran (see previous post on Betfair) as can be seen below (they also have cash to spend on potential M&A).

click to enlargeShare price YTD selected betting stocks

This is a fascinated sector that is in the midst of considerable change. Although I have no financial interest in the sector, I am an intrigued bystander. Bring on the next development.

More musings on the online gambling sector

A previous post on Paddy Power, William Hill and Ladbrokes showed how online sportsbook and gaming revenue are becoming an important part of the revenues of these firms. Another recent post on Betfair showed a similar import. This post will focus on the online gaming (which is a gentlier word used in the sector for what is more aptly described as online gambling) part of the equation.

As a recap, the graph below shows the online gaming revenues from Paddy Power, William Hill, Ladbrokes and Betfair (with PP converted to sterling at today’s rate) which make up 17%, 16%, 8% and 17% of their 2013 revenues respectively. Ladbrokes has approximately half the amount of its competitors. The considerable growth in William Hill’s online gaming (mainly casino) revenue after the creation of WH Online (WHO) in 2008 can clearly be seen. H2 Gambling Capital are forecasting an approximate 9% annual growth in online gaming gross win figures over the next few years

click to enlargeNet Gaming Revenue

None of the firms above split out their operating margins for the online gaming sectors. As casino is the dominant source of revenue for many of the firms, it is interesting to look at a diminutive online casino firm called 32Red, as per the graph below. Although 32Red is relatively small, the reduction in its margin to an average of 6% suggests that competition has pushed margins down in this business.

click to enlarge32Red Operating Metrics

Another two public firms that have a majority of their business in online gaming are 888 and BWIN. 888 is a well established player, particularly in the online casino market, with 40% of revenues in the UK and 40% in the rest of Europe in 2013, and it has been rebuilding its profit margins in recent years. 888’s operating metrics are summarized in the graph below.

click to enlarge888 Operating Metrics

BWIN, following its merger with PartyGaming in 2011, has a higher revenue base across Europe (excluding UK) making up approx 70% of 2013 revenues (25% from Germany) with only 10% from the UK. After some poor results and pressure from shareholders, BWIN is currently cutting its expense base by €30 million or approx 5.5% and is looked at ways it “can increase shareholder value”. BWIN’s operating metrics are summarized in the graph below.

click to enlargeBWIN Operating Metrics

The share performance of these firms has been distinctly mixed in recent years with little old 32Red blowing the others away, as per the graph below. BWIN has clearly underperformed and may likely be broken up. Analysts have speculated that a number of potential bidders, including William Hill and Paddy Power, are looking at various BWIN assets. Janus Capital Management has being building its stake in BWIN over recent months to 11% as at mid-July.

click to enlargeShare price since 2011 888 BWIN 32Red

Comparing the mainly online gaming firms with their more established betting firms in terms of the PBT margin shows the trend for both is downwards, as per the graph below. Headwinds include increased regulation and taxes such as the proposed UK POC tax. Opportunities include the explosion in mobile gambling, the slow re-opening of the US market (although I am sure established US bricks and mortar gambling firms will fight hard for their turf), new product development such as social gaming and the expected market consolidation. Amaya’s recent purchase of PokerStars has focussed minds on what will be needed to succeed in the US.

click to enlarge2003 to 2013 PBT Margin Betting & Online Gaming Firms

One of the more colourful firms in the sector, Playtech, has some interesting things to say about where the future is leading. On increased regulation, Playtech say that “the regulation of online gambling can be a catalyst for market growth, depending on how regulation is introduced, what product verticals the regulator allows and the tax rate applied” and that ”opportunities exist as markets move from a ‘dot.com’ to a ‘dot.national’ regime, although some uncertainties through the transition period are expected”.

Specifically on the UK, Playtech commented that “many smaller operators are understood to generate operating margins lower than the expected tax rate of 15% and in the view of industry experts, will struggle to compete. Larger operators can rely on economies of scale and their leading brands to remain competitive. Analysts expect that in 2015 the UK market will undergo significant change led by consolidation, as those operators with the strongest brands, best technology and means to invest in marketing will prevail”.

Playtech is a software gaming firm which offers a fully integrated platform across games and sports-betting called IMS that many of the main players use (licensees include Betfair, bet365, William Hill, Paddy Power and Sky, amongst others). They also run a white label turn-key operation called PTTS and a joint venture business. Their most well known joint venture was one where they very successfully partnered with William Hill in 2008 in the creation of William Hill Online (WHO). William Hill recently bought out Playtech of their 29% stake for £424 million. In March 2013, Playtech entered into a deal with Ladbrokes (in an attempt by Ladbrokes to diversify their business and catch up with their competitors – see first paragraph of this post) where, according to Morgan Stanley, Playtech “has effectively been given a quasi-equity stake, where it will “own” 27.5% of any increase in profits”. A Morgan Stanley report, although over a year old, has more interesting background on Playtech (they are still hot on the stock). The graph below highlights some of the metrics behind Playtech.

click to enlargePlaytech Revenues and PBT Margin 2009 to 2013

Much of the colour behind the firm has been provided by its 40 year old Israeli playboy founder, Teddy Sagi, who has a bribery and insider trading conviction from his youth in the 1990s. Playtech bought many of the assets used in the WHO 2008 deal from Sagi and also the PTTS assets (70% of this business is from Imperial e-Club licensed in Antigua and Barbuda!) in 2011 which caused concerns about conflicts of interest. Concern over such conflicts on what Playtech may do with its new cash pile from the WHO sale (they returned £100 million in a special dividend earlier this year but still have £376 million in cash as at end Q1) and on potential problems that Sagi’s ownership position may do in gaining access to the US resulted in an offering in March this year which reduced his 49% stake to 34%.

Playtech has stated that their “the Board is seeking transformational M&A opportunities to take the business to the next level.” Although it’s a bit too colourful for me, a number of analysts estimate a 20%+ upside on its current share price and it’s interesting to note that David Einhorn’s Greenlight Capital is a believer with an ownership of 3.8%. That, I think, is a good place to end a post on gambling!

The fascinating case of Betfair

With the ending of the World Cup, my attention turned again to my attempts at understanding the issues facing the betting and gambling sector. For the sake of full disclosure, I am a novice on the sector (I am not a gambler if investing and the odd poker game are not included as such) and have no positions in any betting or gaming stock. My ramblings here, and in previous posts, simply illustrate my attempts to satisfy my curiosity about a sector that is at a fascinating point of change.

In a previous post, I highlighted the changes that the internet has had on the betting and gaming sectors. At that time, I thought the impact of the disintermediating betting exchanges on traditional business models could provide interesting insights into other disintermediating businesses in the financial sector. However, as I have found out more about the sector, such as the results of the traditional betting firms in the UK as per this post, there are a multitude of issues facing the sector such that a review of the impact of the betting exchanges in isolation is not that informative and (frankly) outdated given current developments. Recent developments include regulatory changes such as those in the US which has prompted the purchase of the largest online poker firm Pokerstars by approximately $5 billion by Amaya Gaming and new online taxes such as the forthcoming UK point of consumption (POC) tax of 15% due in December.

As the graph of Betfair’s share price since its floatation in late 2010 shows, the betting exchange model clearly has not had much of a disruptive impact on the traditional business models in recent years.

click to enlargeBetfair historical share price

Rather than go over Betfair’s eventful past in detail here, I will focus on current issues. Niall O’Connor in his blog, bettingmarket.com, has a number of informative articles on the history of Betfair, including this one. Below, I show a graph of Betfair’s profit before tax against the other UK betting firms which illustrates its difficulties in the recent past. The 2012 results (which are Betfair’s YE 2013 results as their year ends in April) exclude some write-offs and adjustments as a result of Betfair’s turnaround plan (which are included in the dotted line). The plan involved refocusing on sustainable geographical betting markets with accommodative regulations and developing a fixed odds betting business alongside the exchange to optimise the liquidity advantages of each model.

The new plan, in effect, admitted that the stand alone betting exchange model was flawed and that some markets “may not have sufficient liquidity to offer an optimal betting experience, notably in ante post and ancillary markets“. The firm estimates its share of the sophisticated bettor market of £150 million at 60-70% but its share of the recreational and occasional bettor market of £500 million at less than 10%. This market is where they see growth and Breon Corcoran, previously Paddy Power’s COO, was brought in as Betfair’s new CEO in August 2012 to execute on the new direction. The most recent results show that the new strategy is delivering better results.

click to enlargeBetfair 10 year Profit Before Tax margins

The focus on sustainable betting markets and cost cutting whilst increasing marketing spending (Betfair were high profile in recent World Cup advertising) can be seen in the graph below. Product development in features such as cash out and price rush (automatically gives the best odds from fixed odds and exchange) are being heavily pushed, particularly in the growingly important mobile market.

click to enlargeBetfair Revenue & Expense Breakdown

As mentioned in the previous post, there is a vast body of academic research on the gambling market and with the wealth of data that Betfair offers, the betting exchange market has been no exception in the studies. The Institute for Strategy and Business Economics in the University of Zurich in particular has some interesting papers. This one, for example, contends that there is a growing body of evidence that exchange markets “exhibit high prediction accuracy as they regularly outperform non-market forecasting methods”. The well-documented long-shot bias where the tendency to overvalue underdogs by fixed odd markets “is less pronounced in person-to-person betting” and this can be used by traders on the betting exchange to arbitrage price differences.

There is a particularly interesting paper by Egon Franck, Raphael Flepp and Stephan Nüesch in the University of Zurich from December 2013 on the importance of liquidity in determining price competitiveness which the authors offer as one of the reasons behind BetFair’s move into fixed odds online betting. Other arbitrage opportunities indentified by research include bookmakers actively shading prices in the presence of a partly irrational betting audience in order to increase their profit (e.g. sentiment bias in football games by the home fans) or the movement in odds prior and during games with the growth of in-play betting.

The development of sports investment funds was previously highlighted in a Bloomberg article and despite an early hic-cup with the collapse of a fund called Centaur there are many now developing predictive algorithms which try to take advantage of arbitrage opportunities. BetFair is consistently looking at how it can optimise its pricing (on the exchange it earns its commissions on winnings by a sliding scale on volume) in different geographical areas and sports to maximise its commissions, despite an outcry from a pricing charge change a few years ago.

Although BetFair face considerable challenges (e.g. I estimate that 95% of BetFair’s sustainable revenues are concentrated in the UK and the firm disclosed that the POC tax, if implemented as currently envisaged, would of cost them £36 million for their 2014 year, one with £61 million of operating profit!) in the short to medium term, one of their strengths is the balance sheet with a net asset ratio of 55% and a cash pile of over £200 million and a strong cash generating business. In their latest results Corcoran commented that “the flexibility we retain through our strong balance sheet provides a competitive advantage during uncertain times for the gaming sector. We will continue to review our balance sheet on a regular basis.” Although Betfair are a fascinating case to keep an eye on, the uncertainties on the POC tax issues outweigh any positive investment case for now.

In my attempts at understanding the sector more, these comments led me to look at some other models (and possible acquisition targets) in the other publically traded online firms, mainly on the gaming side. Names that I have looked at include 888, BWIN (currently looking at strategic options!) and 32Red. I am also intrigued by the software gaming firm Playtech which provides the underlying software to many firms in the sector. I will follow-up with a post on further musings.