BREAKINGVIEWS-Gamblers' $8 bln tie-up raises odds for rivals

Wed Aug 26, 2015 8:17am EDT
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Dominic Elliott

Aug 26 (Reuters Breakingviews) - An all-share tie-up between Paddy Power and Betfair threatens to weaken the hands of rivals. Both businesses look strong and complementary.

The Irish and UK gambling groups already trade at forward 12-month price-to-earnings premiums to betting peers of 23 percent and 77 percent respectively. Quarterly earnings released on Aug. 26 underscore their different strengths: Paddy Power is growing in mass-market sports betting, its UK peer in more sophisticated online exchanges.

That symmetry is reflected in the terms of the putative deal to create a combined entity with a market capitalisation, based on their pre-announcement share prices, of 5 billion pounds ($7.8 billion). Paddy Power shareholders would receive 52 percent of that, as well as a one-off 80 million euro dividend. While "merger of equals" is a much abused term, this comes close. Betfair's share of revenue and earnings is lower than its 48 percent share of the merged company suggests, its online-only business model promises faster growth. Sensible, then, for Betfair Chief Executive Breon Corcoran to lead the group, with Paddy Power's Gary McGann staying in his chairman role post-merger.

Integrating online gambling platforms can be a challenge. But Paddy Power and Betfair aim to continue running their brands separately. Corcoran should know Paddy Power's systems, having worked there as chief operating officer.

Cost savings may prove hard to find, given Corcoran has cut Betfair's workforce by 20 percent. Barclays analysts peg the potential synergies at no more than 50 million pounds pre-tax. There may be a chance to increase revenue by pooling marketing budgets.

Rivals have already been wagering on the benefits of increased scale. Canada's Amaya bought the owner of PokerStars last year, Ladbrokes of the UK is merging with Gala Coral, and Bwin.Party is the subject of a bid tussle. Serious gamblers like to think they can pick off weaker punters so prefer sites with more users, especially in poker. And geographic diversity offers some defence against rising taxes, especially in the UK. Merging is hardly a contrarian bet, but it looks like the right one.   Continued...