Difficult market conditions

Thursday, 17th December 2015 10:49 - by David Harbage

Difficult market conditions (although the stormy weather, mentioned in the previous blog, appears to have eased) or adverse industry developments provide both challenges and opportunities.

Successful businesses - and not necessarily larger ones - will seek to acquire firms whose market worth, for whatever reason, is perceived to be undervalued. Sometimes whole industries may come under threat, perhaps natural resources (via the depressed prices of many of its commodities) is a topical one, and may have to take drastic action in order to survive. That might be a story for 2016, but this article takes a look at what has happened to a very different industry this year.

2015 has been an exceptional one for the stock exchange listed companies within the UK gaming industry which, prompted in part by higher taxation, has consolidated dramatically. The internet brought major structural change, with mobile phones and tablets enabling a new 'betting on the go' experience. Traditional, shop-based bookmaking firms rushed to create online sites but also sought to capture complimentary businesses and customer bases.

In such an environ, UK industry leader William Hill unsuccessfully bid £720m for online gaming business 888 Holdings, but since then we have witnessed a plethora of 'successful' corporate activity. Most of the big names are in the process of merging: Ladbrokes and Gala Coral, Betfair and Paddy Power, with rumour suggesting 'Willie' Hill could make another attempt to add the web-based bingo & casino group 888 to its stable of businesses. Unlisted Bet365 has also been cited as a potential target for a deep pursed predator.

However, over the past year, 888 had been eyeing up prey itself - in the form of BWIN.Party Digital Entertainment - but eventually lost out in a protracted chase to a much smaller rival, GVC. This relatively unknown leisure combine could attract greater investor attention from 2 February next year, when a full listing for the combined group applies, and merits further comment.

GVC, the AIM listed £270million market capitalised online sports gaming business, announced at its Extraordinary General Meeting today that its merger with BWIN.Party Digital had been approved by shareholders. This represents a significant step for GVC, and its well-regarded management, who have an avowed strategy of achieving growth through both organic means and via acquisition. The company's previous major purchase was Sportingbet (except Australia) - previously owned by William Hill, incidentally - in March 2013.

Transformation of that business, along with ongoing progress in its other gaming businesses, has seen turnover and TSR (total shareholder return) increase five fold since Keith Alexander became CEO in 2007.

Recently announced quarterly trading updates from both GVC and BWIN.Party were encouraging and augur well for 2016. Historically, GVC has had a policy of paying out a high proportion of earnings - equating to a double-digit dividend yield - but this strategy has been temporarily abandoned until the new balance sheet recovers. Having said that earnings and a dividend of 40p and 17p are respectively forecast for calendar year 2016. The deal was essentially a reverse takeover (BWIN.Party has a market worth of £1 billion), but fund managers for whom AIM stocks had been 'outside of their investable universe' are likely to warm to GVC's strong cash generation and its management's proven capability to integrate/consolidate new businesses.

Prospective investors will perhaps be guided by their recent experience of AIM listed Optimal Payments, who bought a complimentary European electronic payments firm Skrill - which was larger than itself. Renamed Paysafe Group, the enlarged company's shares commence trading on the London stock exchange's main market on 23 December and the equity, having a market value of £1.6 billion, is set to join the FTSE250 index in March 2016.

Written by David Harbage for lse.co.uk on the 16th December 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.