The gambling industry will be in for an exciting 2016 as multibillion pound mergers are finalised and the shift to online sales accelerates. Which of the major competitors in this race offers the ability to go the distance for long-term investors?
The tie-up between Paddy Power Plc (LSE: PAP) and Betfair Group Ltd (LSE: BET) creates by far the most interesting new player in the industry. Betfair has undergone a resurgence over the past three years as CEO Breon Corcoran has transformed the company into a technology-focused operator taking advantage of its market-leading exchange gaming, which allows punters to play against each other in a variety of games.
The combined company already boasts stronger margins than major competitors and will be second only to Bet365 in online revenue. Betfair’s latest half-year report saw operating profit rise 12% while Paddy Power notched up a 33% gain. Investors have reacted to this news strongly, sending shares of Betfair up over 150% over the past year and Paddy Power shares up 78%. But with Betfair now trading at a staggering 45 times earnings and Paddy Power at a 35 P/E, I would be very wary about jumping in at these valuations with much of Paddy Power Betfair’s potential growth is already baked into the equation.
The merger of Ladbrokes Plc (LSE:LAD) and Gala Coral will create a high-street behemoth with 45% of physical betting shops across the UK and annual revenues of £2.1bn. However, the combined company’s online presence will still lag dramatically behind both William Hill and the newly combined Paddy Power Betfair, which have both successfully grown their online operations. The CEO of Ladbrokes, who will continue as CEO of the new company, has already cut dividends and warned investors that there will be no profit growth until 2017. While this cash saved will be put towards building an improved online presence, investors will be better served waiting on the sidelines until more details are released.
The combined Ladbrokes Gala Coral will replace William Hill Plc (LSE: WMH) as the largest betting operator in the UK by both number of stores and revenue, but this will hardly worry management and shareholders. William Hill has thus far been able to remain apart from the merger frenzy due to its impressive combination of high street presence and industry-leading margins on significant internet revenue.
However, due to its large number of high street shops, overall margins lag behind both Paddy Power and Betfair, which will only grow more competitive after their merger. The company provides strong fundamentals and higher dividend than its major competitors, but remains wedded to its significant retail presence and doesn’t offer the intriguing growth prospects of Paddy Power Betfair.
With changes in betting habits shaking up the gambling industry, quick-footed management and online presence are becoming ever more important. To this end, I believe the combined Paddy Power Betfair will be the most promising long-term investment. But investors should wait until the dust has settled from the merger and watch for valuations to drop before thinking about buying-in.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Betfair Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.