New lottery operator gambles on online sales and technology
The fundamental value of the lottery is derived from potential earnings
Of all the PR challenges facing the next lottery operator, countering claims it overpaid for the licence was probably not one it anticipated.
The €405 million price tag paid by Premier Lotteries, the Government’s preferred bidder, is known to have been over €100 million more than that offered by the under-bidder Gtech.
The disparity prompted one Italian brokerage to label the bid uneconomic.
Equita Sim, which monitors the fortunes of Gtech’s Italian-listed parent, said in a note that the deal was “likely to produce a very poor return for the winning consortium”.
Premier Lotteries, which is made up of An Post and Ontario Teachers’ Pension Fund (OTPP), is said to be less than happy with the assertion but is declining to comment while the terms of licence are being finalised.
Sources say it will defend its bidding strategy on the grounds it expects to make substantial savings from a more efficient technology platform.
Under the terms of the new licence the operator is obliged to roll out a new network of ticket terminals within the first two years of taking over.
Whatever Premier Lotteries has up its sleeve in terms of technology, the bid represents a strong punt on a business that has endured several successive years of falling sales.
Particularly when you consider OTPP paid £389 (€460m) for its subsidiary Camelot in 2010, essentially acquiring the British lottery, a vastly bigger operation with a £6 billion turnover, for just €55 million more.
Nonetheless, Robbie Cooke, chief executive of Australian gaming group Tatts, which also bid for the licence, said the money paid here was “in line with expectations”.
All of which still begs the question how did two big operating consortia, both with an intimate knowledge of the Irish numbers, arrive at such differing valuations?
Apart from the cost base, the fundamental value of an asset like the lottery is derived from the future earnings it is expected to generate.
Price, of course, may deviate from value if future earnings are uncertain or if there’s a belief the asset may be become more valuable over time.
Much has been made of the potential for online growth which currently accounts for only 2 per cent of sales. In the UK, for instance, Camelot generates about 15-17 per cent of sales through its digital channel.
The online potential here is obvious but experts caution it’s more gradual than instantaneous, and is likely to cannibalise a portion of high street sales.
The disparity between the bids may simply come down to the investment preferences of the bidders.
Gtech, which is now the largest gaming entity in the world, may have wanted a faster return on its money than OTPP, a Canadian pension fund, with, presumably, more conservative tastes.
While pension funds have broadened their investment preferences since the financial crash, they still rely heavily on assets with guaranteed income streams which typically deliver steady but modest returns.
OTPP’s subsidiary Camelot have not enjoyed much luck in cracking the US lottery market, losing out to Gtech in Illinois and seeing its only victory in Pennsylvania marred in litigation, prompting some to wonder if a fear of failing in Ireland led to a more exuberant bidding strategy.
One observer described OTPP as a conservative, public sector pension fund which was unlikely to have “rolled the dice” in buying the Irish franchise, regardless of its subsidiary’s predicament.
Camelot is getting flak in the UK for upping the price of its tickets to £2. The effect on sales has yet to emerge. The policy it will adopt here in terms of ticket pricing is difficult to predict.
The Irish business has been crafty in hiding price increases inside add-on draws, with standard two-panel play now costing €3.
Whatever its plans, the new operator will have to work hard to see its numbers come up.