Paddy Power and Betfair set to merge

In an industry bustling with M&A activity, Betfair and Paddy Power have announced plans to merge into one of the world's largest online betting firms. The tie-up would give the combined group a market value of over £6.9 billion, with its new scale and capabilities giving it greater authority in both new and existing markets.

With combined revenues of £1.1 billion the group will be one of the largest in the sector. The complementary online platforms and geographical mix should enable the group to take advantage of opportunities in Continental Europe, the US and Australia.

Set to receive an $80 million special dividend immediately after the proposed marriage, Paddy Power shareholders will own 52% of the new company. Betfair shareholders will own 48%. Paddy's chairman Gary McGann and Betfair's chief executive Breon Corcoran will keep their positions in the combined group, with Paddy Power's boss Andy McCue becoming chief operating officer and executive director.

"The possible merger would create one of the world's largest public online betting and gaming companies by revenue with enlarged scale, capability and distinctive and complementary brands," the companies said on Wednesday.

"The combination has compelling strategic logic and represents an attractive opportunity for both companies to enhance their position in online betting and gaming and to deliver synergies, customer benefits and shareholder value."

Ladbrokes and Gala Coral recently announced a £2.3 billion merger, and GVC is pressing ahead with its takeover bid for bwin.party, although many thought 888 Holdings previously had the deal in the bag.

The pair also announced positive interim results on Wednesday.

Betfair's sales jumped 15% to £135.4 million in the three months to 31 July, even when pitted against last year's Football World Cup. Revenue from sustainable markets rose 24% to £116.3 million, increasing the revenue mix from 80% to 86%. EBITDA (earnings before interest, tax, depreciation and amortisation) rose 19% to £41 million, including a £12.8 million point of consumption tax charge. More customers are using mobile devices to use the group's services, with sales from the platform up 57%.

Paddy Power's operating profit increased by a third to €80 million in the six months to 30 June, with diluted earnings per share (EPS) up 31% at 144.8 euro cents. Losses in Italy nearly halved and growth across all online and retail divisions drove net revenue up 25% to €527.8 million. Management have increased their interim dividend by a fifth to 60 cents per share, and they are confident about the full-year.

"We have made substantial progress implementing the strategy we set out in March, with further payback to come from new mobile product releases, refreshed marketing campaigns and efficiency gains," said CEO Andy McCue. "We now expect full-year 2015 reported operating profit to be a mid to high single digit percentage above 2014 and the consensus market forecast."

Providing some welcome respite in current bear sentiment, Betfair's shares jumped 18% to 3,080p on Wednesday, an all-time high. Over the last year, Betfair's market value has risen by nearly 200% from 1,071p. Paddy Power's shares were also up 17% on Wednesday, at 9,186 euro cents.

There is no certainty the merger between Betfair and Paddy Power will go ahead, but the pair will update the market in the coming weeks.

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