David Prosser: Goldman backs a winner in Betfair

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The Independent Online

Outlook There have been some worried bankers wandering the halls of the Fleet Street headquarters of Goldman Sachs these past few weeks. "We cannot have another Ocado," senior executives have been warning, a reference to the flotation of the online grocer in July. The IPO was humiliating for all concerned, with Ocado first forced to slash the price and then watch as the shares fell further in the weeks following the float. But it was all the more so for Goldman. It is not normally associated with such flops and the fact Ocado is run by two former employees of the investment bank raised eyebrows – did it flog a dead horse out of loyalty to old friends? Well, let us say this for Goldman. Betfair, its first large UK IPO since the debacle, is not another Ocado. It may be another online business and the float may make millionaires of its founders, at least on paper, but that is where the similarities end.

Most obviously, Betfair is a profitable business, whereas Ocado has never made a penny. Only 10 per cent of the betting exchange is up for grabs and it is raising no new money, whereas the Ocado IPO was more like a rescue rights issue than a conventional float.

Still, there are some nagging doubts about Betfair. Can it really command the very full valuation that the market expects it to ask? Will the very small tranche of shares on offer disappoint the market? And why no retail offer from a consumer-facing company?

Moreover, while the online betting exchange has taken the gambling industry by storm since its launch a decade ago, sales growth has now begun to slow and margins are slipping in the face of larger investment costs and higher marketing spend.

Plainly, what the company needs now is expansion, a move into new markets to deliver the next phase of growth. One possibility is the push into financial betting planned for the final quarter of this year. International development is another – one reason Betfair gives for wanting a stock-market listing is that it will then be more credible with regulators in the countries into which it might move.

Still, neither route is a guaranteed winner. In financial betting, Betfair will not have the first-mover advantage it exploited so successfully as it built its business. And even with a London Stock Exchange listing behind it, international development will be subject to the whims of regulatory authorities that, in many countries, have not been kind to online gambling operations.

Let's not be churlish. Betfair is a success story and deserves its day in the sun. Goldman is not selling another pup. Just be aware that the company's second decade of trading may prove to be tougher than its first.