Betfair shares hurdle fragile FTSE on merger news

Updated 2036 BST

The FTSE 100 tanked again on Wednesday, but it was not all doom and gloom in the UK stock market.

Despite the benchmark following the lead of US markets, which failed to hold on to positive sentiment before closing, and another helter-skelter ride in China’s main stock market, there were several pockets of strength among UK-listed stocks.

Highlights

• Betfair gallops 20% higher
• WPP stays bullish on China

This article will be added to and updated over the next few hours.

Anglo-Irish agreement

The biggest riser in the UK’s main stock market on Wednesday was web-based gambling company, Betfair Group, after it announced a ‘merger of equals’ with Ireland’s Paddy Power.

Shares of both betting firms traded as much as 20% higher after an agreement in principle to a £5bn tie-up.

They were still talking, they said, to finalise the merger which would probably create one of the biggest online betting companies in the world, with revenue of more than £1bn and 16% online market share.

Ladbrokes Coral would have 14% (if competition authorities allow them to merge, as I suspect they will, on condition of asset sales).

Note the closeness of these current market-share estimates: they’re likely to be assessed as acceptable by the UK’s takeover watchdog, the Competition and Market Authority

As the deal stands right now, Paddy shareholders will get 52% and Betfair’s the rest.

Paddy’s would also be in line for a one-off payout of €80m.

The news will be no surprise to followers of the UK betting industry.

Gambling company M&A activity has reached near fever-pitch over the last several months as firms scramble to scale-up online, aiming to defray the impact of tougher regulations and the threat of faster-growing Internet-only upstarts.

I summarised my view that William Hill is emerging as the primary loser, from all this—at least at the moment; races can change very quickly.

The other big on-going UK betting industry news, aside from Ladbrokes’ is about a bid battle between online ‘party poker’ companies 888 and GVC Holdings, both of which want to buy Bwin.party Digital Entertainment.

The notion of a ‘merger of equals’ is being adhered to in spirit, albeit not strictly speaking, in fact.

Paddy’s bigger market capitalisation (€3.46bn/£2.55bn) vs. Betfair’s (£2.43bn) may lie behind the fact that its chairman is slated to keep that role in the new group.

Its CEO would become COO, whilst Betfair would contribute its finance chief, dispense with its chairman, but retain well-regarded Breon Corcoran as CEO.

However, even if there’s no guarantee that ‘BetPaddy’ (just a suggestion) will definitely seal their deal, it looks likely.

The one area of potential difficulty might surround Betfair’s role as, essentially, counterparty for many of the names mentioned above.

This role might be in conflict with its exploitation of opportunities as an online betting exchange with retail punters.

The extent of Betfair’s services being used by large bookmakers to hedge their own bets is unclear, given the sensitivity of this business.

And whether the deal goes ahead or not, some investors are already curious about why Betfair, the original counter-trend bookie, focusing on sports trading instead of ‘ordinary’ betting, wants to become more like the latter type of business.

If there’s any substance to notions that the betting exchange market is becoming saturated, there could be trouble down the line for the new group, or Betfair standalone, if the deal is called off.

Shares of Betfair could possibly be the most vulnerable among the two parties, given that today’s addition of 20% on the day took the year-to-date rise above 100%.

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That compares with about 36% for Paddy Power’s secondary listing in London.

For the rest of Wednesday’s session, any give-back of Betfair Daily Funded Trade’s gains probably wouldn’t begin before visible resistance-turned support around 3050-3100 gives way.

There’s a possibility of stronger support at the more important 38.2% retracement which comes in at 2962.5.

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WPP stays bullish on China, investors less so

WPP Plc. is either beating its global rivals or slightly trailing them, depending on whether you choose the net sales or like-for-like sales gauge to measure its first half performance.

Either way, it’s definitely ahead of its rival for the top spot in Europe, France’s Publicis.

Using LFL, WPP sales grew 4.9%, vs. 5.2% at Omnicom and 6.2% for Interpublic.

At Publicis they were just +1.2%.

WPP netted 2.3% in H1 and for July, sales accelerated 3.7% higher.

It gives credence to CEO Martin Sorrell’s confidence for the rest of the year (for which 3% is the target) and given unequivocally strong growth in the States, there’s decent probability that he’ll be proved correct.

As spectacular as China’s economic and financial market collapse is proving to be, WPP shows strong signs of being on the right side of the cycle, for this year at least.

For these reasons, my view is that WPP’s underperformance of the UK stock market on Wednesday is somewhat awry.

Its stock has been as weak as 3.5% lower.

However, with its high-profile, CEO Martin Sorrell being a well-known “unabashed bull” on China, WPP shares are likely to continue bearing the brunt of investor panic for the medium term.

For trading in the name today, City Index’s WPP Daily Funded Trade tumbled, just like the underlying, after a ‘long exit’ signal was emitted by the attached ‘Slow Stochastic Reversal Cross System’ at 0900 BST.

The trade doesn’t look a picture of upside strength on the day, with corrective rises likely limited to 76.4% of the day’s fall so far, especially as that would cohere with where the last short-term uptrend broke.

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