Betfair’s share price

http://www.markxdavies.com/
31-1-13

The post below is my latest column for Gaming Intelligence Quarterly, and was therefore written a few weeks ago. Notwithstanding the news about Ladbrokes and Betda q that has been announced since, I think it still stands. So I am reproducing it here now that the edition has been published.

As we move into the New Year, I thought I’d pick up a subject that I usually do my best to avoid: Betfair.

With more than two years now having passed since the company fell off its once lofty perch with a share price crash from the heady heights of £15.50 to below £8 – a level at which it has remained to this day – it seems a sensible moment to ask: whither the company in 2013?

We used to say at Betfair in the early days that the next six months were always the most crucial in the company’s history. It is funny to think that thirteen years on from its launch, that is probably as true of the next half as it ever was. Unless something happens over the next two quarters to restore confidence in the organisation, it will probably bump along forever at the sort of miserable levels that shareholders have now endured for some time.

I wasn’t expecting it would be like this. The company announced its new Chief Executive, Breon Corcoran, back in August 2011, and was sure enough it had the right man to believe that it was worth waiting a year to get him. It was fair, then, not to expect any share price recovery over that twelve month period. So, too, was it fair to expect little to happen in his early months, as he got his feet under his desk.

What probably wasn’t expected was a 10% price fall once he had announced his new strategy. Just when it felt like sub £7.50 would be a price of the past, the stock crashed back through support and started to plumb long-unseen depths.

But given that (in changing strategy to pull out of territories that are not ‘clearly legal’) Corcoran forfeited 24% of revenues at a stroke, you could say that a 10% fall was not a bad result. The question now is whether he will balance those losses with sufficient gains to recover to a more appropriate market cap.

£20m in cost savings announced in December is a good start, but I would imagine is really only that. The fact about Betfair that shocks people like no other is that it employs around 2,500 people around the world – a state of affairs I can’t imagine remaining for much longer. Years of dealing with structural issues by throwing people at the problem have taken their toll in a number of different ways: people both inside and outside the business have been frustrated for years by the level of bureaucracy, which (in combination with a framework that made it too easy to abdicate responsibility) has continually stifled the delivery of product.

The extent to which that is true is best illustrated by two things. The first is the sportsbook, which was delivered in 2011. I remember clearly when the need for it was first discussed, because the late Bob Horton was present at the management meeting in question. His role as Chairman was briefly executive in the fourth quarter of 2005.

The second is in-play – a product which Betfair was first to bring to market. Its loss of market share in this area, when the exchange model’s risk-management system is so well-suited to it, would be less frustrating had it not been talked about at such length over the years with nothing effective being done to reverse it.

By stripping out inefficiencies and creating accountability, I suspect Corcoran will have done more to put Betfair back on the right footing than analysts realise. I’ve piled back into the shares, down 10% or not