Cash-rich bet365 drives on
Cash-rich bet365 drives on
The recent annual results from bet365 demonstrate to what degree the company dominates the European-based online gambling space but also pose interesting questions about how the company would be treated were it a public entity.
It should be mentioned immediately that this is unlikely. The company is closely-held by the Coates family and every indication is that it wishes that to remain the case. More to the point, there are no drivers for a listing – no-one involved in the company is interested, as far as we know, in a liquidity event and there is no desperate need for cash for further investment.
Indeed, quite the opposite is true. As of March 2016 the company had £1.1bn of cash on the balance sheet, up from £915m at the same point in 2015. As the report filed with Companies House in September stated: “The directors are confident that the balance sheet will continue to grow, due to the highly cash-generative nature of the company.”
The dividend paid out to the current shareholders – which from what can be seen on Companies House consists largely of Denise Coates and her brother John Coates – totalled £127.5m for the year.
This total more than covered by the betting operation’s pre-tax profits of £451.1m (£459.6m in total when the £8.5m profit from Stoke City FC is included). Operating profit was slightly lower at £448.3m (the pre-tax profit minus £2.8m of interest) and net gaming revenue (which the company classifies as turnover) was £1.55bn.
Much has been made in the gambling press of the slowing rate of NGR growth. In the year to March it rose 5% compared to 15% in the year to March 2015. Similarly, amounts wagered rose £2.3bn or 6.6% in 2015/16 to £37bn compared to an £8.2bn or 31% rise the year before. The company said active users increased 11% in the year to March whereas in the year previous active sports users rose 43%.
Slowing growth then, but there are mitigating factors – the lack of a World Cup during the period and the instigation of AML and problem gambling-related harm minimisation measures, for instance.
What we don’t get is any commentary in terms of geographic distribution. If bet365 was listed we would have more colour on the geographic split of the current earnings and perhaps an idea of the differing growth rates. As it stands, we know that the UK is now worth over 25% while approximately 30% of the business comes from Asia/China and the rest is made up of continental Europe and Australia.
The splits count because of how they would affect the valuation of the business. As it stands, there is quite a variation across the listed sector in terms of price/earnings ratios depending on the degree to which the various constituents are seen as being successful online and whether they are weighed down by land-based concerns.
Top of the tree currently is Paddy Power Betfair which, with its attractive mix of regulated online and minimal (bit profitable) retail in the UK and Ireland, has a forward P/E ratio for this year of circa 30 times. Slightly further down, according to analysis from earlier in the year by Morgan Stanley, is Unibet at around 20 times its 2016 earnings. Then comes the Ladbrokes Coral merged entity at around 15 times, alongside Playtech, Betsson, 888 and Rank.
If we apply a similar rating to bet365, and given the earnings above, it would give bet365 a market cap of circa £6.7bn. This puts it slightly behind with the circa £8.1bn market cap for Betfair but ahead of William Hill at around £2.6bn (at least prior to the news regarding the potential Amaya merger) and the likely market cap for Ladbrokes Coral of slightly less than £3bn.
Yet, an argument could be made for valuing bet365 at much higher than 15 times EBITDA. It is, after all, purely internet, unencumbered by retail and market leader in most of the markets in participates in. On such a reading, it might be thought that a valuation multiple closer to Unibet or even Paddy Power Betfair might be appropriate. At 25 times, for instance, bet365’s value would rise to circa £11bn, making it the clear European-based gambling sector behemoth.
But that is to reckon without the complications of how the financial markets treat regulated and unregulated markets in terms of valuation. GVC is the most high-profile example of a company where a relatively even mix of the two means the market values the company at a lesser multiple than the rest of the market.
Though attitudes are in the process of evolving on issues around the acceptability of unregulated earnings, lagging fears over the long-term (un)predictability of grey market revenues means that at a market cap of around £2.2bn, GVC is valued at around 11 times its projected 2016 earnings. A similarly even mix at bet365 – albeit with potentially greater opacity over China – would mean bet365 would be valued at around £4.9bn.
Totally Gaming says: This is all speculative given that bet365 is unlikely to be hitting the public listed sector any time soon. China would surely be an issue in any float, but as we have seen previously with online gambling, the ability of the market to forgive regulatory opacity shouldn’t be underestimated. Like the rest of the sector, bet365 likely faces a tougher year in 2017 but as has been said about the sector in the wake of the spate of large-scale M&A activity, scale matters. It’s just that bet365 has got there without having to merge with anyone.