Paddy Power, the betting firm, said today in a trading update ahead of it AGM, that the group is facing additional headwinds in 2009, as has already been reflected in market expectations. It has alas announced an acquisition in Australia for a €27.2m consideration.
Paddy Power said the year on year growth in sportsbook amounts staked has accelerated significantly compared to the first two months of the year. This increased growth is due to:
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business momentum, in particular as it expands the online business outside of Ireland;
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an increased level of recycling, as adverse sporting results benefited customers; and
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the negative impact of racing cancellations in the first two months.
The other impact of the unfavourable run of sporting results is a sportsbook gross win percentage in the period below the guided range in non retail, with the telephone channel most affected.
In constant currency, non retail and retail sportsbook amounts staked have, compared to the same period last year, grown by 31% and 1% respectively in the first 19 weeks of the year to May 12th. On the same basis, gaming and machine gross win has grown by 9%. Cost management initiatives remain on track. As at 11 May 2009, the group had no debt and cash of €96m, a position of "excellent financial strength and flexibility in the current environment."
Paddy Power announced its entry into the Australian betting market through the acquisition of 51% of Sportsbet Pty Ltd.
Sportsbet, which has been operating for over 15 years, is one of Australia’s largest corporate (i.e. non pool) bookmakers and is licensed to undertake business throughout Australia. Sportsbet’s activities comprise bookmaking on racing and sports for Australian customers through online and telephone channels. Sportsbet also owns 19.98% of International All Sports Limited, a publicly quoted competitor. Paddy Power will appoint four directors to the Board of Sportsbet, including Patrick Kennedy and Breon Corcoran, and will have a voting majority on the board.
Matthew Tripp, Sportsbet’s controlling shareholder and Chief Executive Officer will continue as CEO post completion.
The initial consideration payable by Paddy Power to acquire 51% of Sportsbet will be A$48.5m (€27.2m). This will be satisfied at completion by a cash payment of A$45.8m (€25.7m) (from Paddy Power’s existing cash reserves) and the issue of 100,000 Paddy Power shares to Sportsbet shareholders. Sportsbet is forecasting EBITDA of A$14.6m (€8.2m) for the year ending 30 June 2009. Additional cash consideration of A$10m (€5.6m) will become payable to Sportsbet shareholders in early 2010 if the EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) of Sportsbet in the 2009 calendar year (before transaction and restructuring costs) exceeds A$16.5m (€9.2m).
Commenting on the Acquisition, Patrick Kennedy, Paddy Power’s Chief Executive, said: “This business is an excellent fit with Paddy Power. Sportsbet has a strong, well run business together with plenty of potential to build on its market position in Australia. The acquisition adds a new dimension to our business portfolio to which we can bring trading, risk management and marketing expertise honed in Ireland and the UK to complement Sportsbet’s existing skills and experience.”
Goodbody analyst Killian Murphy commented: "This morning’s IMS from Paddy Power not only highlights the continued resilience of the online gambling sector, but also an improving retail sector. The non-retail division (online and telephone) is the standout performer in the statement. In constant currency terms amounts staked in non-retail sportsbook increased by 31% yoy (having been up 16% in January and February), implying an increase of 43% yoy in the second half of the quarter. This has been achieved by: (i) winning market share; (ii) increased level of recycling (driven by favourable results for punters); and (iii) the reversal of the negative impact from race cancellations.
Amounts staked in the non-sportbook (online gaming and machines) has increased by 9% yoy, a strong performance given the much published increasingly competitive mature of this market. The retail division has also seen an improved performance as amounts staked have increased by 1% (having been down 5% yoy in January and February, implying a 7% increase in the last two months). Some of this improvement reflects new openings in the period, on a lfl basis amounts staked are down 8% yoy, a marked improvement on the 13% decline in the first two months of the year, due largely to less race cancellations. Favourable race results have reduced the gross win margin in non-retail to below the guided range of 7-8%. We do not view this as a concern as sporting results historically tend to average out over the year.
In addition to its IMS, Paddy Power has also announced that it has acquired a 51% stake in Sportsbet, an Australian based online and telephone company, for an initial consideration of €27.2m (of which €25.7m will be funded from its cash reserve, with the balance being made up in shares) and total potential consideration of €32.8m (if earnings targets are achieved). Sportsbet is largely an online company (90% of profit generated through online) and growing strongly (active customers up 72% yoy, turnover online up 35% yoy).
We view this as a good deal for the company as: (i) it has a strong brand (no 2 in Australia); (ii) Paddy Power has an equity clawback clause (if targets are not met) and a call option to acquire the entire company in 2012 or 2013. Should the option not be exercised, the minority shareholders can buy Paddy Power out; and finally (iii) we anticipate that this deal will add circa 0.5c to EPS in a full year. Given the reassurances provided in the IMS regarding current trading, Paddy Power’s relative low risk profile compared to its peers and larger exposure to the growing online sector, we are becoming more positive on the stock. Incorporation this view into our DCF and SOTP valuation matrix generates a price target of €18.50. Hence we are upgrading our recommendation from Add to Buy."
