CVC takes opportunistic tilt at Betfair

April 15, 2013

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

CVC is taking an opportunistic tilt at Betfair. The buyout giant’s admission that it may make a bid for the UK gambling outfit follows Betfair’s terrible run since flotation. But CVC could struggle to persuade investors to fold their hands at this stage.

Betfair’s betting exchange cuts out bookmakers by allowing punters to bet directly against each other. That eBay-like innovation shook up professional gambling. But as with Ocado and Promethean World, two other UK tech debuts from 2010, the float was badly overhyped. The “bookie that believed it was Google”, to quote one acid newspaper profile, has since delivered investors a negative 45 percent, or 81 percentage points below the FTSE-250’s return.

CVC’s admission of interest was forced by a leak, so there are few details yet. The group, which is investing a gigantic 10.75 billion-euro fund, now has four weeks to assemble a proposal or face being put off-side by UK takeover rules.

A conventional 35 percent premium to Friday’s close would value Betfair’s equity at 944 pence a share. That equates to nearly 980 million pounds ($1.5 billion) or a hefty 27.8 times Starmine’s consensus earnings for the coming financial year. If industry rivals – such as former CVC asset William Hill – also take an interest, the price could rise. It’s not clear what the logic of such an offer would be. These businesses don’t naturally lend themselves to leverage. Still, Betfair has net cash and CVC may reckon it can run it harder both operationally and financially.

The difficulty is that investors will still perceive CVC to be pouncing when the company is undervalued. Betfair’s new Chief Executive Breon Corcoran has launched a revamp, backing away from legally risky “grey” markets, cutting costs and targeting more of Britain’s big “recreational gambling” market. If all goes well, analysts at Jefferies reckon the company could be worth 1,100 pence a share.

Moreover, Betfair’s register is highly concentrated. Founders Ed Wray and Andrew Black, Japan’s Softbank, and French billionaire Bernard Arnault together own nearly 39 percent. CVC has early backer and 6.5 percent holder Richard Koch onside. But it needs to persuade other big holders to surrender some of their potential upside, or to roll their shares into a new private vehicle. Merger arbs will need steady nerves to place bets at this particular table.

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