Leisure Spread proves that its gambles pay off

With a profit of €150,000 and plans for expansion into international markets, Leisure Spread is also aiming for a stock exchange listing, writes Una McCaffrey

There is a theory that only a few business sectors manage to achieve growth at a time of economic downturn, with the old reliable bookies usually at the top of the list. It is not a bad notion, particularly in light of the growth notched up by some Irish betting firms amid the economic uncertainty of the past few years.

One man who is in a better position than most to vouch for the phenomenon is Mr Conor Foley, who established his spread-betting operation, Leisure Spread, in 2000, just as the economy was taking on a distinctly shaky aspect.

Four years on, Leisure Spread has just posted an after-tax profit of €150,000 on turnover of €73 million for the 12 months to March 31st and is planning expansion into as many international markets as it can find.

A listing on London's Alternative Investment Market (AIM) is also planned for next year, when profits are due to have reached the low millions.

Leisure Spread, the parent company of three separate betting ventures, was established in early 2000 with what Mr Foley calls "low-level seed capital" provided by, among others, himself and co-founder Mr Brian O'Neill.

Both had previously worked in financial services, with Mr Foley a former currency trader with Smurfit Paribas and Mr O'Neill formerly of Irish Life.

It was the first company of its kind to be launched outside the UK at the time and was launched with the aim of attracting Irish punters who may previously have bet across the water.

The business was initially focused solely on the sports market through Sports Spread, with an internet-based financial spread-trading arm (Share Spread) launched at the end of the second year. A small fixed-odds arm has also been added.

Mr Foley explains that spread trading on the financial markets works as a kind of proxy to traditional share trading, whereby the punter wins or loses according to movements in the stockmarkets.

The typical client will either bet money on a share or a stock index (such as the Dow Jones Industrial Average) making a certain movement within a certain period. For example, if a punter was interested in owning Stock X but did not have the means or desire to pay for a block of 10,000 shares, they could take what Mr Foley calls "an equivalent position" with Sports Spread for just €100. In practice, this means that if a punter places €100 on each cent gained or lost by Stock X, they will make €100 - the same amount that they would gain if their 10,000 shares gained one cent. Crucially however, the spread trade will attract neither capital gains tax nor stamp duty.

Trading on indices or currencies works in a similar fashion, with Sports Spread then going into the wholesale market to hedge the bet by taking an equal and opposite position.

As with the average bookie, the firm benefits when its clients make the wrong judgment, with all bets settled three months after they have been made.

It is in this business that Mr Foley sees most potential for future growth, with a serious move into the UK now at an advanced stage and expansion into the potentially enormous Chinese market also on the cards.

This grand plan for international expansion has, of course, required additional funding, with the company now on its third money-raising drive in two years.

The first, led by IIB Bank in 2002, brought in €2 million from individual shareholders such as golfer Mr Paul McGinley, soccer player Mr Kevin Moran and Mr Peter Blessing of corporate finance house, CFI. A year later, Merrion Corporate Finance led a €3 million financing that brought in new shareholders such as Mr Ray Curran, formerly of Jefferson Smurfit. The current drive, which is so far being handled by Leisure Spread itself, is likely to take in about €5 million, with existing shareholders likely to be the main participants.

A listing on London's AIM around this time next year is the "ultimate objective", according to Mr Foley. "We can do additional funding at that time."

He says the main reason for this year's fundraising is to give Leisure Spread the kind of capital adequacy that will satisfy the requirements of UK regulator, the Financial Services Authority (FSA). While spread betting is not regulated in the Republic, approval from the FSA is critical if the firm is to progress its plans for a London-based ShareSpread operation.

At the moment, close to 10 spread-trading firms operate from the City of London to cater for a market worth several billion pounds sterling. Presuming FSA approval comes through, ShareSpread will join them from an office in Regent Street that will be populated by 12 traders lured from rival firms. The business will be supported by a back-office unit based in both Dublin and Newry, where Leisure Spread has won a grant of €435,00 from the North's inward investment body, Invest Northern Ireland, to employ 50 people.

Mr Foley says the London business will target itself mostly at financial trading, where it hopes to tap into a market were annual profits stand at about £150 million each year and look to be poised for annual growth of 25 per cent. Crucially, FSA approval will allow the firm to advertise.

Leisure Spread has also recently opened an office in the Far East, where it has gained custom in both Taiwan and Hong Kong. A shift into China is the main aim for the company however, with "every country in the world that has a gambling culture" a potential future target.

Bullish talk such as this automatically gives rise to fears that Leisure Spread, like so many of its less-successful technology forebears, could be growing too fast for its management to handle. Mr Foley says he is not overly worried.

"It is a concern but if you centralise the risk management and the back office, all you're doing is business development. You can still run it all from a central operation," says Mr Foley.

He explains, by way of illustration, that the firm's Far Eastern desk is managed from Dublin, where three back-office staff work through the night on an internet-based system. Almost two-thirds of Leisure Spread's overall business is now conducted over the Web, with all of the Asian business done over the medium.

Mr Foley says the firm is now operating at its maximum capacity in Asia, with further growth to require more internal expansion. The business model in Taiwan and Hong Kong differs slightly in that it sees the company dealing with agents who then do business with a wider range of clients. The focus is again entirely on financial spread-betting, with positions on the Nikkei and Dow Jones indexes among the most popular bets.

Moving into China will bring new and very specific challenges for Leisure Spread and Mr Foley is under no illusions about needing to develop some local market knowledge before proceeding for real.

The international expansion has not halted development at home either, with Leisure Spread due to set up business relationships with a range of non-betting entities over the next few months. The most intriguing of these, and arguably the one that gives the best measure of Leisure Spread's success to date, will see the company link with a prominent stockbroker to allow the broker's clients to engage in financial spread trading.

Mr Foley rejects suggestions that this could simply result in a cannibalisation effect for the stockbroker in question, arguing instead that it will simply open up new trading opportunities for its customers. "It's a logical extension."