The gaming sector has been in a considerable state of flux over the past three years, driven by the rise of mobile betting technology and social media. The bookmakers' traditional role is changing quickly, with bookmaking and gaming companies turning into sophisticated marketing machines, with back-office functions effectively outsourced to a handful of key third-party technology companies.
That is the prevailing trend, but the results season showed that some big bookmaking companies are managing this change better than others and the differing approaches taken by Ladbrokes and William Hill help highlight the strategic split in how the sector is responding to change.
The comforting fact for investors is that it is still difficult for a bookmaker to lose money. All the big bookmaking firms reported increased operating profits for the first half, with the change to betting on handheld devices driving a much better yield per customer as gamblers switch between sportsbook betting, in-play markets and casino games. It is emblematic of the changing nature of the industry that social gaming, network marketing and "digital actives" are slowly replacing gesticulating tic-tac men, trilby-hatted bookies and friendly ladies manning the Tote booths at race courses.
Ralph's choice…
The most eye-catching performer among the big bookmakers has undoubtedly been William Hill. On the face of it, Hill's relationship with technology company Playtech looks like a match made in heaven given that their jointly-owned online business has delivered sales growth of over 30 per cent so far this year. But relations between the firms can only be described as cool.
The first of two buyout dates for William Hill to make an offer for Playtech's 29 per cent portion of the online business looms at the end of this year. Whether management decides to exercise the buyout option will depend on the valuation of the venture conducted by an independent assessor, with analysts pencilling in £500m-£600m as a likely negotiating range. Whether the option is taken now or later, Hill's chief executive Ralph Topping will need to sign a very large cheque to take control of the online business, whilst still retaining Playtech's services as a consultant. This points towards a very significant capital raising combining both debt and equity either later this year or early 2013.
How Playtech will react is impossible to judge with certainty. A lot will depend on the views of major shareholder Teddi Saggi who will doubtless demand the best possible deal. Even if Playtech is bought out, its technology and know how will still be crucial to William Hill's online business.
Glynn's dilemma…
Ladbroke's Richard Glynn would probably love to have William Hill's problems as he tries to impose a new way of working on a venerable old institution. Ladbrokes, for all of its traditional haughtiness (turf accountant to the Queen and assorted high rollers), is perceived as the industry's monied if conservative dowager aunt, finding it hard to change with the times and embrace new technology. That may be an unjustified criticism now, given the outlay on digital betting, but it is also true that the bookmaker is still in serious danger of being left behind by William Hill.
To close the gap, Ladbrokes has to deliver the promised upgrade to its online service. But the transformation process is not going smoothly. Having decided to go it alone in updating its software, in preference to buying out an existing online gaming company, Ladbrokes has discovered that delivering large, complex IT projects on time and on budget is very difficult. So far, the failure to roll out the upgrade on time has cost the director concerned his job (at a cost to Ladbrokes of £500,000) and pegged back profits at its re-organised online division. With the sports book now forecast to come into service later in the fourth quarter, investors will need to wait until mid-2013 to see whether Glynn's self-help strategy is ultimately successful. At least the group's improved marketing is having the unexpected side-effect of underpinning the traditional over-the-counter business.
IC VIEW:
A key question when looking at the potential winners and losers in the sector is: how well is online performing, and at what cost? Ladbrokes Digital is not doing that badly; its mobile operation doubled its sales in the first half and the company has significantly more active digital users. However, turning the business around is costing a fortune. So checking whether a gaming company has fully up-to-date software and a digital strategy should be the starting point before investing. Being a good bookmaker is pretty much a given, how else does a company survive except by laying off risk?
The other increasingly crucial point is that the market rates predictable regulated revenues far more highly than online gaming sales generated in the market's many grey areas. Part of the problem for Ladbrokes was that taking over companies with established technology platforms, like SportingBet or 888, would have exposed it to markets where regulation is in flux - and chasing returns in exotic foreign markets has always proven to be risky in gaming.
| FAVOURITES |
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Paddy Power will report its interim results at the end of this month, so investors will then be able to make a better comparison, but the Irish bookmaker has set the standard for others to follow. Not only are its profits growing by more than 15 per cent a year, but the company was one of the first to see the potential of mobile and online betting and the early mover advantage, combined with its revenues all coming from lucrative regulated markets, makes it the obvious core holding in the gaming sector. The only problem is the rating, which tends to stay in the mid-20s, but the company always delivers as promised. A more tentative favourite is betting-exchange company Betfair. The share price has found support since it re-organised its marketing and started to add new features and markets to its website designed to appeal to more casual gamblers. Betfair does at least avoid the pitfalls of having to manage the risk of laying bets off – the second quarter was universally tough for the traditional bookmakers as results came in for punters – but generating the revenue growth will need a lot of marketing nous. Having halved since the IPO, the shares reflect this basic reality, but with a new chief executive hired from Paddy Power arriving this summer, expect the marketing push to gain momentum. |
| OUTSIDERS |
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| There are significant questions over the long-term prospects for Bwin.Party after the last trading statement warned the market about regulatory changes in Germany, the company's biggest market, hitting cash profits by between €5m-€10m this year. Added to that is the exposure to difficult economic conditions in southern Europe and a presence in markets that are not fully regulated. It is true that Bwin has a record of returning cash to shareholders (€100m last year) but, in this context, this represents a payment for shouldering much higher risk than for UK-based operators. Like Paddy Power. Bwin reports at the end of the month. |
