Bwin.Party and Betfair – How low can they go?
By Warwick Bartlett
In GBGC’ newsletter of August 2010 we discussed the potential for the Bwin PartyGaming merger. You should read it again!
The City investment analysts were predicting that this would be the start of the great consolidation in the sector and the newly merged company would mop up business in the new European regulatory environment.

The shares reached a high of 234p, touched a low of 100p in mid-August 2011 and were trading at 127p at the time of writing. This represents a loss to shareholders of 45%, even after the boost given to the price by good news from Schleswig Holstein.
At a dinner hosted by KPMG on the eve of the Betfair float guests were invited to write down what the Betfair value should be the next day. I wrote down 750p. I was wrong, but not very wrong. They closed on 16 September 2011 at 772p, a loss to shareholders of 50% from October 2010.
What seemed patently obvious to us at GBGC was not seen by the wider market. The Internet gambling model has changed, particularly for listed companies. On many occasions I have said that unlisted companies do much better than those that are listed on the Stock Exchange because they can take on a degree of regulatory risk. 

They are also just so much quicker at making decisions in a really fast moving business where technological change is constantly pushing the boundaries.
You will also recall that Internet companies since inception were stating that digital was the future and that the land-based business was tired, run by the older, less “techy” generation and out of date.
The reality is that the land-based business is doing better than the Internet only sector. Those businesses that combine online and bricks and mortar gambling services are excelling as the chart comparing Bwin.Party with William Hill demonstrates. It would seem, at least for the time being, that “clicks and mortar” is the way to go. 
There is now little difference between the costs of running an Internet-only business compared to a land-based business. But land-based gambling is set up to enjoy better margins.
Internet gambling companies have missed an outstanding opportunity of being able to leverage their high stock market valuations from 2005 to 2007 to buy land-based businesses that were out of fashion and cheap. 
Investors call us up and ask this question: “Does the betting shop demographic mean that they are trading in a dwindling market?”
My answer is this: “I was asked that question in 1980, 1990, 2000 and today, if it were true, betting shops would not have any customers by now. But they do.”
Having lost so much value, are Internet stocks set for a rise in value? The news from Germany is very good and provides a useful boost to the sector. It just might be the catalyst for change that may cause other countries to adopt a more reasonable approach to taxation. There are many unresolved issues on regulation and taxation which should pass during the next 9 to 12 months at which time there could be the opportunity to see a recalibration in value. 
The drivers are still in place for Internet gambling. Improved and exciting technology increases the gamblers’ enjoyment and creates the opportunity to find value. The only missing ingredient is willingness for governments to create the right fiscal regime.
The industry has still not managed to overcome how it is perceived in the echelons of power. The public, through lotteries, horse racing, poker and betting regard gambling as mainstream entertainment but not so for politicians. The political establishment still regard gambling as unseemly and they have a dislike of operators who make money from gambling. A point proven by the fact that gambling companies pay disproportionate amounts of tax relative to their peer group in the leisure sector.
France has already conceded that its high tax regime is not working and ARJEL has proposed a lower rate. The tide may be turning. Fingers crossed.