Paddy Power Betfair, the industry view

While this morning’s news of a potential Paddy Power and Betfair merger may have surprised the market, it certainly hasn’t disappointed with analysts and other industry observers upbeat about the combined firm’s potential.

The consensus is that both operators are going into this from a position of strength, something which couldn’t be attributed to potential bedfellows Ladbrokes and Gala Coral, who in June announced plans to merge.

Here we compile some of the industry views on Paddy Power Betfair.

“The Paddy Power brand appeals to recreational customers. Betfair’s Exchange appeals to sophisticated customers. Betfair’s Sportsbook is gaining traction with recreational customers. The combined entity therefore should appeal across the broad spectrum of online customers,” says Barclays analyst Partick Coffey.

“The combined, enlarged group will be a world leader in online betting and gaming with a market cap of c£6bn and pro-forma EBITDA pre-synergies of c£285m,” says Cenkos Securities analyst Simon French. “It will have a strong balance sheet with the potential to deliver further acquisitive growth and or cash returns to shareholders. The cultural fit should be fairly seamless given Breon’s strong influence in both companies and the geographic exposure predominantly complementary.”

“These companies are a great fit,” says Regulus Partners founder Paul Leyland. “Culturally they are very similar and they are very complementary brands. They are clearly sports-led, but have sophistication on one hand and entertainment on the other. That covers the spectrum of why people want to bet. The customer proposition of exchange sophistication to entertainment to offers is fantastic,” he adds.

“This is very interesting merger,” says Panmure Gordon analyst Karl Burns. “If Betfair is looking to accelerate their success in the fixed odds arena then this is the right way to go about it. Integrating the exchange and the Paddy Power sportsbook with Paddy Power’s superior CRM and marketing capability could take a lot of market share. Everyone will come under pressure for market share, particularly William Hill.”

“This merger is about two of the gaming industry’s strongest players, with a familiar philosophy, getting together to create something of even greater scale and depth,” Peel Hunt analyst Nick Batram says. “In terms of execution risk, this looks pretty small given Breon’s long and successful tenure at Paddy Power. Underlying, both Betfair and Paddy Power are delivering sector leading performances; combined, they will represent a very powerful team.”

“Paddy Power’s proposed merger with Betfair is the latest in a wave of consolidation sweeping the gambling industry. Tighter overheads is one key factor behind the M&A drive, but increasing regulation is too,” says Cavendish corporate finance partner Jonathan Buxton. “Securing economies of scale and cost savings through consolidation is one way the industry is trying to cope with the significant pressures it is under. Odds are high that the formation of ‘Betty Power’ won’t be the last sizeable deal in the sector.”

“There will be plenty of savings to be made while there’s also the option of using the exchange to hedge PP positions and using PP to boost Betfair liquidity,” says one unnamed CEO of an international operator. “Breon knows both businesses well so will understand fully what needs to be done – I’m sure this a merger with the head and not the heart. Paddys also has a desire to go into the US and this deal can also solve that.”

“I’m disappointed to see Betfair, who pioneered the exchange model, take yet another step away from its roots,” says Smarkets CEO. “Instead of embracing the value added through this model like Smarkets, it is morphing into yet another old-fashioned bookmaker. While this may bring short-term shareholder value, lack of innovation in the industry is damaging for consumers.”