Competition hots up for Paddy Power as smaller UK rivals seek market share

Paddy Power is facing increased competition in its UK online business as smaller rivals attempt to carve out a larger slice of the market ahead of tax changes that are due to take effect in 12 months.

The Dublin-listed bookmaker yesterday warned that a string of punter-friendly racing and football results would leave operating profit for the year around €11 million lower than it forecast when it published interim numbers in August. The news sent its shares tumbling by 8 per cent to close at €57.45 in Dublin.

David Jennings, analyst with Dublin stockbroking firm, Davy, suggested that investors were less concerned with the temporary impact of unfavourable sports results than with the increased competition in the UK that the company also highlighted in its interim management statement.

At the end of June, Paddy Power.com, the group’s Irish and British online operation, had 1.2 million customers, of which 900,000 were UK-based, making it one of the most significant aspects of its overall business.

The British government intends to begin taxing online gambling from December 2014. As a consequence, smaller players are stepping up their marketing campaigns to recruit more customers ahead of the charge’s introduction.

Online gaming tax
"That is leading to marketing cost inflation and ultimately lower returns per acquired customer," Mr Jennings said. "And while such behaviour is not sustainable, it is not likely to cease until some point post the introduction of UK online gaming tax in December 2014."

Paddy Power's chief executive, Patrick Kennedy, told analysts yesterday that companies that make up the bottom 10 per cent of the UK online betting market are responsible for 30 per cent of current media spending, double their outlay this time last year.

"We've seen this movie before," he said, pointing out that last year,ahead of similar tax changes in Australia, where the group is the biggest online player, second-tier operators markedly increased their marketing spend. This ultimately proved unsustainable for many of them.

In a note issued following the group’s statement, Mr Jennings said that Davy has no doubt that the Irish bookmaker will be one of those left standing in the UK when the dust settles, but warned that it is likely to be a prolonged battle.

Mr Kennedy stressed that Paddy Power would maintain discipline when it comes to spending on marketing. As a rule of thumb, the group spends 20 per cent of net revenues on this activity and, in broad terms, does not intend departing from this over the next 12 months.

In its statement, which covered the period from July 1st to last Sunday, the group said that its overall underlying performance was good. Excluding Australia, its sports betting on-line revenues were up 15 per cent, while gaming and business-to-business turnover grew 17 per cent. In Australia, online revenues accelerated by 26 per cent.

The total amount that punters staked across its business grew 14 per cent. Net revenues, the difference between the amount wagered and that actually won by punters, grew 7 per cent.

Gaming machine revenues
The positive trend seen in its Irish bookie shops in the first half continued, with the amounts stake up 5 per cent. There was similar growth in its UK shops, where gaming machine revenues were up 3 per cent, excluding the impact of a weak July, where it fell 1 per cent as a result of the good summer weather. It opened 46 shops across Britain and Ireland during the period.

Excluding customer balances, net cash on November 17th was €171 million. It has no debt.