Questions over PPB's 'big bet' on the US market

6 March 2019

Paddy Power Betfair has set out a four-pillar strategy through which it aims to grow the business in 2019 and beyond, though analysts have questioned whether this leaves the operator over-reliant on regulatory progress in the US.

A tentpole of its growth strategy is to pursue the US opportunity “rigorously”, with the operator noting that its fantasy sports, TVG racing and Betfair Casino businesses all grew in 2018.

Investment and product enhancements and promotions drove a 14% increase in active customers, with revenue up 13% for the year.

However, despite the New Jersey sportsbook securing a 35% share of the early-stage market, the US division incurred a £15m (€17.4m/$19.7m) proforma EBITDA loss in 2018. A £10m contribution from TVG, FanDuel and Betfair Casino was offset by a £24m investment in the sports betting offering.

This is down to significant marketing and customer acquisition spend, with the operator saying that prospective expected returns would significantly outweigh the acquisition costs.

This means the sportsbook is likely to make a negative contribution in 2019, with Paddy Power Betfair admitting that it may take between 18 and 30 months post-launch to see a positive contribution from the vertical.

Furthermore, US operating costs, excluding marketing, are expected to increase from £106m in 2018 to between £145m and £155m in 2019.

Too much focus on the US?
Analysts at Regulus Partners admitted that this was a “relatively big bet” on the market, albeit one on solid foundations, with strong state penetration, an extensive product range and based on in-house capabilities.

Regulus noted that Paddy Power Betfair does not have exposure to the same risks as competitors William Hill (FOBTs) and GVC (FOBTs and dot.com activities). However, its core growth strategy appears to be contingent on the roll-out of sports betting regulation in the US.

“This is not a bad bet (with a lot of patience), but not one that management is in much control of; moreover, given the level of interest in the US it is quite a crowded bet,” Regulus said.

Paddy Power Betfair said it is in the process of identifying additional markets beyond its core territories, with plans to target “podium positions” through a combination of organic growth and M&A activity.

“Successful execution of this strategy can ensure that the group capitalises on the global trend towards online regulation, increases its diversification and ultimately expands the number of core markets that generate sustainable cash flows,” the operator explained.

Driving further into core territories 
The US and new market focus will be complemented by a push to grow sustainably in core territories such as the UK, Ireland and Australia.

In the UK, Paddy Power has been repositioned as a recreational brand, which has helped turn the brand around following years of decline. This, in turn, could allow Betfair to focus on avid betting customers as it looks to halt a decline in exchange betting revenue (down 2% in 2018).

Exchange liquidity has been affected by Betfair withdrawing from international markets as a result of regulatory changes. By focusing on avid punters, it aims to acquire bettors who will use both the exchange and sportsbook products, positioning the fixed-odds offering as a product for dedicated customers, as opposed to Paddy Power’s recreational focus.

“Bringing Betfair's two products, value proposition and marketing strategy more closely together will take time but can significantly improve our positioning,” the operator said.

This will be supported by efforts to expand Betfair’s international footprint. Currently, Paddy Power Betfair said, the brand’s international offering is “sub-optimal” in many areas, constrained by a lack of flexibility in the underlying product and technology.

Tailored approach
As a result there will be a focus on building a new “global” product that tailors its offering depending on each market, supported by regional promotional and marketing spend. The additional costs this will bring will be offset by leveraging Paddy Power Betfair’s scale and proprietary platform.

“Successful execution of this strategy can enable us to increase the group's international diversification, while continuing to ensure that the group's overall profitability is not exposed to any material concentration of revenues within particular markets,” the operator explained. “The nature of the exchange liquidity ecosystem also means that growing international revenues can also improve the Betfair proposition within its core markets.”

This will all be done under a new brand, with the operator to seek approval to rename the group as Flutter Entertainment at its Annual General Meeting in May.

“This change will ensure our corporate name better reflects the increasing diversity of the group, which currently consist of six consumer-facing brands (Paddy Power, Betfair, Sportsbet, FanDuel, TVG, Adjarabet) with global operations across Europe, Australia, and the US,” it said.

"The new financial year has started in line with our expectations. The acquisition of Adjarabet is further evidence that we are delivering against our strategy, and whilst there will inevitably be further regulatory challenges, we are excited about the growth opportunities ahead of us."

However, Regulus Partners suggested that the business still lacked strategic momentum.

“For PPB to regain its strategic momentum, it needs to be able to grow the market in Europe and find ‘podium’ spots with more visible, attractive and sustainable fundamentals than Georgia, in our view,” Regulus said.

“It is not yet clear to us how this will be achieved.”