Betfair looks to regain its winning streak

The City is wondering if the betting exchange has lost its way, and not just its CEO, since last year's IPO

Betfair's name will be up in lights today as the sponsor of the King George VI & Queen Elizabeth Stakes in which last year's Derby winner, Workforce, will seek to bounce back from his recent defeat against four top class rivals.

The £1m midsummer highlight of the British flat racing season will see the company's branding prominently displayed on the BBC, which is broadcasting the event. And it will hope to gain from some positive PR from the race. The day will, in other words, afford the betting exchange a brief respect from the wolves who are pursuing it in the City.

It wasn't so long ago that Betfair was carrying all before it, revolutionising the betting industry and frightening the life out of the bookies. But times have changed and the company is now seeking a new chief executive to pull it out of what one analyst described as "a perfect storm".

Firstly there are its rivals which, after spending years fruitlessly complaining about the exchange's treatment by the tax and regulatory authorities, have done what they arguably should have done all along by turning up the competitive heat.

Meanwhile the exchange's recent decision to follow betting companies offshore is unlikely to benefit it for long. This week the Treasury unveiled a review of gambling taxation which will likely force all offshore online operators to pay the same 15 per cent tax on gross profits that land-based operators have to pony up. This follows the decision by John Penrose, the minister responsible for gambling, to require firms taking bets from UK citizens obtain a licence from the Gambling Commission.

The operation's international expansion strategy has also been called into question by various countries apparently moving to close the doors to betting exchanges.

Initially, Betfair's long anticipated flotation last October was a success, with the shares racing ahead after they were priced at £13 (valuing the company at £1.4bn). They were chased up to a high of £16.10 amid frenzied demand. Since then, however, it's been all downhill and yesterday they closed at just 658p.

Financial statements since the company joined the markets have singularly failed to impress. In June, Betfair said "core" revenues grew by just 7.8 per cent for the year ending 30 April. That wasn't enough for investors, given the shares' lofty rating.

The figures were released just days after chief executive David Yu announced plans to step down – one of a number of senior figures to depart in recent months. Insiders argue that while Mr Yu is a whizz when it comes to technology, his communication skills are less stellar.

BGC Partners' partner David Buik, a City veteran who has had stints in the gambling industry, says he remains a fan of Betfair but argues that the company has work to do. "What they really need to do is hire a chief executive with communications skills who can explain the strategy to the market and get investors back on side. A City veteran, not necessarily from the gambling industry, who can also provide the leadership the company needs."

Mr Buik also raises questions about the position of Ed Wray, one of Betfair's co-founders, as chairman. "Betfair needs a new broom. It will be appointing a new CEO, but needs a new chairman who commands the respect of analysts to get the Betfair message across. Currently it has fallen on deaf ears."

Analysts say that the company needs more than that. They argue that there are structural problems that need to be addressed. And fast.

Paul Leyland, Investec's gambling analyst, has a sell rating on the shares even at their current depressed level. He says: "I'm concerned that given their cost base it will be difficult to make money in a taxed UK environment and difficult for them to do in Europe on a regulated basis too. It's unclear that their current business model is appropriate. Operationally they don't have much room to maneuver and from a regulatory standpoint they are being squeezed in their most profitable markets."

James Hollins, at Evolution Securities, is less bearish and has shifted to neutral on the shares after being an early seller. But he also says that Betfair has deep-seated strategic problems. "The question they have to answer is should they be spending a shed load of money chasing international expansion or whether they should focus on their UK business – which is, after all, a very good business – and take advantage of those international opportunities that do exist. If they do this they have to take some costs out and stop running it as an enormous business with all those people in Hammersmith."

What stops Mr Hollins from turning more bullish on Betfair is that "no one knows what the strategic decision is". With the chief executive an unknown (Mr Yu remains in post until a successor if found) it will probably be left to Mr Wray. But will his pride prevent him from performing a volte face at a time when operations such as Paddy Power, William Hill and Bet365 are snapping at his heels with compelling online offerings of their own?

All the same, it's probably too early to call time on Betfair as a contender for the corporate Derby just yet.

Head of communications Tessa Murray accepts that the company has work to do, but says: "We're obviously disappointed by the share price performance – it's due to a combination of factors, some down to us and some facing the sector as a whole – which is why our peer group has fallen by 20 per cent on average.

"We've made some improvements to the business but the fundamentals remain unchanged – we offer the best prices and the exchange is more popular than ever – there were 20 per cent more bets matched year on year – a record 916 million. Plus, we are a growing business in a growing market with no debt and £150m on our balance sheet. We set out a plan at our results last month showing how we're going to deliver shareholder value – through top line growth, margin improvement and return of excess cash to shareholders."

That includes integrating its sportsbook – where Betfair acts as a bookie – with the betting exchange, which matches people making bets with people laying them. This will allow people wanting to take an early price on, for example, a horse race to get on before the exchange's market is fully formed (which can take some time for minor races). Instead of punters setting the price, Betfair will do it.

Ms Murray argues that while regulatory doors have apparently been shutting, things can change very fast. And sentiment can change very quickly. Take those taxation changes. They may yet make life difficult for smaller, weaker online and telephone bookies who rely on their low tax offshore locations to turn a profit.

Betfair is still a thoroughbred: while it needs a new jockey, it is still at the races alongside Ladbrokes and William Hill.

How the bookies fought back

*The exchange loudly trumpets that its prices are 20 per cent better (on average) than bookmakers' starting prices. Betfair also enables punters to "lay" horses to lose as well as backing them to win. And then there's the revolution of betting "in running" while a sporting event is under way.

Well, in terms of pricing, bookmakers have worked out a very punter-friendly offer: the "guaranteed price". Let's say you back a horse at 5-1 but the odds drift and the starting price is declared at 10-1. With the guaranteed price the bookmaker will pay you at 10-1. If the price comes in to say 2-1, no problem. You'll get still the 5-1 at which you placed the bet.

Most bookies also now offer betting "in running" (particularly good for football or cricket). But the ability to "lay" is still unique to Betfair – and the prices you can get on outsiders still make its offer potentially compelling.

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on Scotland's oil keeping the First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
PROMOTED VIDEO
News
i100
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
footballThe latest scores and Twitter updates from tonight’s games, featuring Bayern Munich vs Man City and Chelsea vs Schalke
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Arts and Entertainment
Maxine Peake plays Hamlet at Manchester's Royal Exchange
theatreReview: Maxine Peake brings emotional ferocity to Shakespeare's starring part
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week