Betfair shares hit a new all-time low Friday, dropping 39.5p (5.5%) to 682p — just 32p over half its £13 IPO price last October. The ‘down’ button was pressed by analysts at UBS, which announced it was cutting its target price from 775p to 660p on concerns over the lack of underlying growth contained in Betfair’s recent full-year results.
Further downward pressure was applied by BancoEspirto Santo de Investimento’s new target of 630p. Analyst Alistair Macdonald also cited lack of growth as the source of Betfair’s problems, and warned that the company’s plan to remedy the situation could backfire. “Betfair’s updated growth strategy is effectively turning into a conventional bookmaker over time, diluting the original exchange proposition. In addition, we are concerned by the possible exchange liquidity impact of increasing commission charges for highest value customers.”
This commission increase is scheduled to kick in July 18. As many as 500 whales whose lifetime profits top £250k and bet in over 250 markets will face charges of up to 60% of gross win. Betfair claims to essentially break even on their whale wagers, but that handling their technical demands takes profits away from other sectors. “Betfair believes that the implementation of the adjusted charge will provide the business with fair compensation for the service it provides to those impacted customers, who currently pay a rate of commissions and charges that does not reflect the benefit they gain from the Betfair ecosystem.”
But as Alistair the analyst noted, the Betfair ecosystem is slowly morphing into a conventional bookmaker via the expansion of its fixed-odds offering (‘risk-based products’ in ecosystem-speak). That could pose problematic, not to mention a tad hypocritical, as Betfair has previously argued that its exchange model set it apart from trad bookmakers, and thus it should be taxed more favorably.
The emphasis on fixed-odds wagers reinforces the growing meme surrounding Betfair that they’re last year’s model; bereft of new ideas, like if Apple had followed up the iPod with a portable 8-track tape player. (Look it up, kids.) The meme is perhaps a tad harsh. Undoubtedly, Betfair has a lot of very bright people on its payroll, many of whom would be eminently capable of righting the ship if their hands weren’t so tightly bound.
In 2009, CEO David Yu was asked about a potential IPO, prompting him to caution that “there are pros and cons of being public.” Among other things, Betfair claimed that going public would give the company “the flexibility to react to a developing and consolidating online betting and gaming industry.” Betfair clearly envisioned going on a shopping spree of symbiotic companies, paying with shares instead of cash. But with the stock trading at half its IPO value, the early investors holding the £13 shares won’t stand for a further dilution of their holdings. So new opportunities for growth can’t simply be bought over the counter.
Nor can they be achieved via an expansion into Asia, the planet’s biggest betting market. Among the IPO cons of which Yu warned, the shareholder agreements that preclude Betfair from establishing a presence in Asia loom largest. And with no Asian strategy in the works, the company will likely never achieve the new growth it so desperately craves. David Yu has already deployed his ejection seat, meaning Betfair will have a new CEO by October. Unless he/she arrives holding a secret blueprint for a new iPod, or the money to take the company private again, his/her tenure will likely be a bumpy one.
