Paddy Power shares surge following news of proposed Betfair merger

Shares in Irish bookmakers Paddy Power surged yesterday following the news it is planning a merger with rival Betfair to create one of the world's biggest gambling companies with revenues of up to €2 billion.

Paddy Power and Betfair announced yesterday they have agreed the terms of a possible merger; at the same time the Irish company reported profits for the first half of the year rose 33 per cent to €80 million.

Paddy Power’s stock climbed by more than 19 per cent to close at €93 in Dublin yesterday after more than three million of its shares changed hands. Betfair made similar ground in London, adding 20.4 per cent to end the day at 3,134p.

Global business

A deal would create a global business with revenues estimated at €1.5 billion, based on both companies’ recent financial performances and a total value of €7 billion at yesterday’s closing prices.

Davy analysts David Jennings and Robert Stokes said post-merger turnover would more than likely top €2 billion on the basis of figures the pair released separately yesterday.

Under the proposal’s terms, Paddy Power shareholders will get 52 per cent of the enlarged entity and will receive a special dividend totalling €80 million before any deal goes ahead. Betfair’s owners will receive 48 per cent of the new company.

Paddy Power chief executive Andy McCue, stressed yesterday there is still no certainty the proposed merger will go ahead. The two are still discussing a number of terms and it is conditional on due diligence.

Mr McCue also said the proposal is likely to have to be notified to competition regulators in a number of jurisdictions.

He indicated it is likely to be next year before any transaction is completed and described a timeline of early 2016 as “quite aggressive” but agreed that it could be possible.

Mr McCue would not be drawn on whether it would result in the loss of any of Paddy Power’s 5,000-plus jobs. However, he stressed the merger should provide the basis for further growth.

In a statement, both companies said the strategic rationale for a merger was compelling as it would leave the new entity better placed to compete in new and existing markets and create cost and revenue synergies. The new company will be called Paddy Power Betfair plc and will have a dual listing in London and Dublin. However, it has yet to be worked out where it will be headquartered.

Mr McCue and his colleague, chief financial officer, Cormac McCarthy, indicated both the Republic’s 12.5 per cent tax rate and the UK’s modern gambling regulations are likely to be weighed in deciding that.

Post-merger

Betfair chief executive Breon Corcoran, a former Paddy Power chief operations officer, would head the new company. Paddy Power’s chairman, Gary McGann would take on the same role postmerger, while Mr McCue would be appointed chief operations officer.

Betfair's chief financial officer, Alex Gersh, would fill the same post at the new group. Mr McCarthy confirmed he would leave following the merger.

Talks on the proposal have been under way for a while, said Mr McCue: “It helped very much that both sets of management know each other.”

The deal is the latest in a flurry of mergers and acquisitions activity in the sector. Last month, Ladbrokes and Gala Coral agreed to join forces, creating a group with potential revenues of €2.8 billion. Sportsbet owner GVC Holdings is in a bidding war with 888 for Bwin Party Digital Entertainment.

Paddy Power reported yesterday that revenues in the first six months of 2015 rose 25 per cent to €528 million from €396 million during the same period last year. Operating profit grew 33 per cent to €80 million from €60 on the back of growth across all its online and retail betting businesses in Europe and Australia. Betfair released figures showing revenues rose 15 per cent to £135 million in the three months to July 31st.