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.

Arts and Entertainment
Joel Edgerton, John Turturro and Christian Bale in Exodus: Gods and Kings
film Ridley Scott reveals truth behind casting decisions of Exodus
footballArsenal 2 Borussia Dortmund 0: And they can still top the group
Arts and Entertainment
An unseen image of Kurt Cobain at home featured in the film 'Kurt Cobain: Montage of Heck'
filmThe singers widow and former bandmates have approved project
Andy Murray with his girlfriend of nine years, Kim Sears who he has got engaged to
peopleWimbledon champion announces engagement to girlfriend Kim Sears
Arts and Entertainment
Jake Quickenden and Edwina Currie are joining the I'm A Celebrity...Get Me Out Of Here! camp
Arts and Entertainment
George Mpanga has been shortlisted for the Critics’ Choice prize
Albert Camus (left) and Jean-Paul Sartre fell out in 1952 and did not speak again before Camus’s death
Arts and Entertainment
Roisin, James and Sanjay in the boardroom
tvReview: This week's failing project manager had to go
ebooksNow available in paperback
Ed Miliband visiting the Holocaust museum in Jerusalem. The Labour leader has spoken more openly of his heritage recently
newsAttacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But are the barbs more sinister?
Arts and Entertainment
'Felfie' (2014) by Alison Jackson
photographyNew exhibition shows how female creatives are changing the way women are portrayed in advertising
Life and Style
Fright night: the board game dates back to at least 1890
The vaquita is being killed by fishermen trying to catch the totoaba fish, which is prized in China
environmentJust 97 of the 'world's cutest' sea mammals remain
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Langley James : IT Support; Helpdesk, VMware; Manchester, £18k

£16000 - £18000 per annum: Langley James : IT Support; Helpdesk, VMware; Manch...

h2 Recruit Ltd: Business Development Manager - HRO - £70k+ ote

£35000 - £450000 per annum + £3k car, £70k ote: h2 Recruit Ltd: Do you want to...

Citifocus Ltd: Newly Qualified Accountants - Risk Mgmt

£Attractive Package: Citifocus Ltd: Prestigious financial institution seeks to...

Citifocus Ltd: Operational Risk Analyst

£Negotiable: Citifocus Ltd: Experienced operational risk professional with ban...

Day In a Page

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?