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For sale, bidders welcome

The Betfair/CVC conversation fell apart late last night, about 20 hours before the end of a 24-hour extension that had been granted by the takeover panel, presumably at Betfair’s request.

This morning, the Betfair share price opened down about 9%, and has since recovered from an 80pence fall to be down only 30p on the day. Something, it would seem, is afoot.

Quite what, is not absolutely clear. But I gather that in contrast to what is being said in public, the private briefing coming out of the company (and I should stress that I have spoken to no-one there, nor anyone involved in the bid) is that pace the CVC statement which suggested that the two sides could not agree financial terms, in reality it wasn’t price that was the issue: the sticking point was strategy.

On the basis that sellers are not usually concerned about what the strategy of a buyer is going forward, the natural conclusion must be that in some way, the CEO and management team were integral to the CVC bid. If, despite this, there was a disagreement on strategy, it must also mean that their being integral was not a CVC condition, but one put down by one (or a group) of the selling shareholders.

In other words, what it looks like has happened is this: CVC and Richard Koch have come to the table with a strategy perhaps not dissimilar to the Fantasy Betfair one that I outlined recently; and the CEO and his team said they preferred to run in the direction they have already set. At least one big shareholder must then have insisted that Breon Corcoran was part of the future make-up, and that unless he (Breon) were, he (the shareholder in question) wouldn’t agree to the deal. And as a result, everything fell apart.

If that’s right (and it would  explain why the share price has recovered as well as it has), it suggests that there’s a For Sale sign over the company, for better or worse. I’d be surprised, at any rate, if it turns out that this bid story is done.

Posted in Betfair, Betting industry.

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8 Responses

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  1. Trigger Happy says

    Reading your previous comments regarding Mr Koch it would have been nice if someone who believed in the exchange side of things had taken over. Breon hasnt set the world on fire so far for me. Straightforward to lay off the staff and make cuts but he has been invisible and Betfair still dont seem to have an easily recongnisable public face especially with Calvin leaving.

  2. Graffiti says

    Betfair’s problem is a very simple one. Have they ever put enough thought into their pricing?

    Market liquidity operates along an S-curve / sigmoid function. Initially it is hard work (the first early players can’t get matched at a fair market-clearing price, or bets they leave up are unmatched). Once a market reaches a critical mass, then the conflicting opinions kick in, and the betting turnover starts increasing at a much faster incremental rate, with only a proportionately smaller increase in the number of players.

    Betfair need to address the S-curve with their pricing. It just isn’t good enough to have the same pricing policy for a major liquid market, as it is for a side market where there is a danger of liquidity drying up.

    If a layer operates in a big main market, they pay normal charges. But someone putting liquidity up into a side market adds a much greater value to Betfair’s diversity of markets/betting events. There has to be the introduction of a financial incentive for people, especially key big layers, to make it cheaper to operate in a market which will be in essence a lot less profitable for them (their bets won’t get matched as easily/often, they will have to give away value to get anything matched).

    Betfair’s pricing is almost exclusively based on profit/loss, whereas it needs to be changed to reflect liquidity, especially urgently needing to focus on favouring people who leave bets up in illiquid markets. The time and effort people put into side markets makes them proportionately much harder work and more hassle. This must be reflected by Betfair in its pricing, and is why Betfair’s current pricing is, well, a bit meh.

    Betfair needs at the extreme, where a market has dropped below critical mass, to not just offer zero commission to big layers, but if the little fish come and nibble away, paying 5% commission on their side of the bets, why not give maybe even half of the commission to the layer. You would then in effect have NEGATIVE commission on bets in these markets to the layer, whilst a boost in turnover overall, with Betfair getting half of the commission, is better than getting none at all, surely? 🙂 .

    A market maker would suddenly find that markets which were much more costly to them to price up (not just in pecuniary terms, but in time terms too) would suddenly be back in play and worthwhile participating in.

    You then reduce these discounts/incentives once sizeable liquidity has been reached.

    There is something intrinsically valuable to Betfair in having as many markets being offered, with as deep liquidity as possible. Ever thinner and narrower side markets drive people away. The reason side markets have shrivelled is solely because of a faulty mix of pricing/incentives to people to get involved in them.

    There is also huge room for a new type of market-making. The “crack trading team” is a throwback to the stone age of bookmaking, and an embarrassment for Betfair. What is obvious, is the crack team often don’t understand pricing in the internet era. The crack trading team needs to be disbanded, it is a waste of time and money. Betfair haven’t spotted what to replace them with. I remember Betfair buying a small company/startup which analysed betting patterns (to stop linked accounts, through intelligent analysis of them..?). That is where the future of pricing is, that is where Betfair will find the answer to their liquidity problems.

    A large part of me thinks the Betfair sportsbook and exchange separation is a huge mistake. Ebay made a strategic decision to show less information/clutter to new users, to keep it initially simple, but more frequent users were allowed a much more full set of information. I think the exchange and sportsbook should be merged, where someone who logs on in the UK (to keep things simple), they will see say 5/6, and take 5/6 on a bet, but behind the scenes you could actually give them 1.95 or whatever the current higher price available is on the exchange. That would keep things simple for Joe Public, but bearing in mind Yu and Morana’s epithet when they spoke together on record saying they could see that people kept coming back and playing more when they got a better run for their money (hence why Yu was in favour of the Betfair education/statistical database tools etc), this would combine great value, with simplicity. I suspect the crack trading team don’t care how profitable Betfair is, they probably care how much money is diverted onto their poor prices (often with knockback size).

    Betfair should be a £5billion+ company. It should be the biggest and best bookmaker of all. I don’t even think that gambling bets should be the flagship profit for the Betfair exchange to match, but that is by the by. It would be great to see Betfair in 2015 aspiring not to be Paddy Power 2013 “Lite”, but to be Betfair 2013 “heavy”, if you see what I mean.

  3. bigdipper says

    Graffiti: There has to be the introduction of a financial incentive for people, especially key big layers, to make it cheaper to operate in a market which will be in essence a lot less profitable for them (their bets won’t get matched as easily/often, they will have to give away value to get anything matched).

    Well, aside from whether there needs to be an incentive or not, the side markets will be a lot more profitable for these market makers in %age terms, because it is easier to capture value in illiquid markets. I agree with you essentially in the idea that a price-taker and a price-offerer are differentially valuable to Betfair in relation to what the company offers the casual punter, and that Betfair’s pricing should reflect this.

    The Paddy Power model was for the recreational £20 player to hand over his money chuckling at Paddy’s japes and underpants, with Paddy’s accountants knowing full well that the implied value of his bet was £17.85.

    This model cannot work for an exchange. It’s doubtful that an online only bookie can forge the same customer relationship as Power with their growing estate, and then there are probably greater shades of price-sensitivity in recreational players than Betfair’s management can model, such that to become a one-shop shop for Betfair’s casual at home they have to be better price on the football and on short-priced horses more often than their model allows.

    But the main reason is that Betfair pay its MMs for price-finding and taking risk; and if they don’t ‘pay’ them enough (or, what’s worse, try to pick their pockets every week), then they won’t carry on providing liquidity where their gains are marginal.

  4. bigdipper says

    *I meant ‘to become a one-stop shop for the online/mobile punter Betfair hope to attract they need to offer better prices than they do currently’.

  5. bigdipper says

    Graffiti: The “crack trading team” is a throwback to the stone age of bookmaking, and an embarrassment for Betfair. What is obvious, is the crack team often don’t understand pricing in the internet era. The crack trading team needs to be disbanded, it is a waste of time and money.

    The most embarrassing element is how often this ‘crack’ team make a mockery of Betfair’s adverts. ‘Cashback if 2nd to the favourite up to £100’, the ad says. Then you try to back a horse for £100 and are knocked back as limits apply. How much ASA-bait do the company really want to dangle?

    It’s reached the stage with Betfair where 95% of the customer’s serious customers and liquidity providers are disgruntled and despairing over the extent of the company’s departure from the pure exchange model. The company wants to go forward with the small remainder by number of its market makers, mostly incumbent layers paying over 20% of their profits in commission through variance. But especially after it brought in pc, it has found that these ‘approved layers’ can’t do enough to give the site a broad enough range of liquid markets.

    The question is whether it is bought out on the back of the ‘sticking plaster’ measures it has introduced to paper over a slowdown in the rate of profitability of the pure model or whether it has to dampen stock market expectations before committing to the long haul of ‘Fantasy Betfair’.

  6. Graffiti says

    The Betfair sportsbook should be there to dovetail with the exchange, not to cannibalise it.

    Keep it simple for new users, where they see 5/6 on Team A and 5/6 on Team B when they log onto the Betfair sportsbook. But if they place a bet at 5/6 which can be hedged into the exchange at a higher price, you then have a bet matched satisfying both Punter A who takes the 5/6, and Punter B who is laying on the exchange at evens.

    Betfair’s new USP in their tv ads could be that they are the only bookmaker where if after you place a bet, they can “UPGRADE” the price/winnings you take out, they will. That would be a very powerful USP, as no other bookmaker does that. In effect all you are really doing is putting fish money into the exchange, but there would be a lot of goodwill from punters if they thought that Betfair would “UPGRADE” their winnings quite a lot of the time.

    The Betfair ads on tv would be good – bet with other bookmakers, and you get only the normal price, but bet with us, and 80% (for example) of the time, we’ll UPGRADE your winnings. “Betfair the bookmaker where we upgrade your winnings”.

    As it stands, positioning Betfair with the sportsbook and making the exchange hard to find, is costing a lot of money in hiring the crack trading team, is alienating all the Punter B’s who want to lay at evens on the exchange, and is draining the exchange’s profitability and viability. This is quite serious on the side markets, where liquidity is in danger of spiralling below the critical level, and has fallen below it at times.

  7. Trigger Happy says

    All pretty irrelevant if Corcoran is quoted correctly on the Betfair forum as saying he is not here to “pay homage to the exchange”. Not sure why the exchange has to take a backstep to the sportsbook, can’t they run both (separately) as profit making businesses?

  8. colston says

    In the early days Betfair had an identity crisis in that they didn’t know if they were a gambling or IT company!
    Now it seems they think the sportsbook is the way forward for bookmaking!
    Wise up Betfair, you invented the wheel, everyone thought the exchange idea was simple and genius.
    The sportsbook is a backward step, believe in the exchange it’s still the future of gambling.
    A late reply I know but just returned from a couple of weeks in Cape Verde, no rain for a year, 29c every day with a pleasant breeze, luverly! Beats getting stuck for over an hour going 2 junctions on the M25 on my way to Lingfield yesterday!

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