Scott Longley – Hold Tight! GVC’s rollercoaster road ahead…

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Scott Longley

Having completed its takeover bwin.party Entertainment , Scott Longley asses the betting operators next steps as the new merged outfit targets a FTSE 250 listing. As the firm’s governance and leadership begins to execute the first steps of its integration plan, Longley details what may be the betting sectors most interesting merger. 

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It didn’t take long for GVC to make its intentions clear for making good on its promise to find €125m in synergies from the bwin.party acquisition by 2017. By announcing in early February the renewal of PartyPoker operations in 21 markets exited by the previous regime, the new owner laid down a marker for how the company would continue to treat regulatory risk across the whole business.

Before the news broke of the nearly two dozen ‘grey’ market re-entries, it was commonly held that GVC’s regulatory waterfront was becoming less hazardous by dint of the newly augmented revenues from regulated jurisdictions including the UK, Italy, Spain, France and New Jersey.

Yet GVC has always been a hard company to read from a regulatory standpoint. The countries grey market roots derive from its Casino Club-generated German revenues and with BwinParty’s German sports-betting and gaming revenues thrown into the mix, it leaves the combined entity with circa 26% of total NGR emanating from that country.

This grey market exposure was compounded pre-Sportingbet with the East Pioneer service agreement deal which saw it take on Sportingbet’s Turkish operations as part of a B2B arrangement. Now wholly part of the business, Turkey represents 11% of NGR while another 5% comes from Greece.

If GVC had a tangled regulatory web before the deal, it very much remains so post-acquisition. As noted by one analyst, the company operates in over 30 countries but only has licences in 15. Yet despite these grey or outright black revenue percentages, the regulatory squeamishness of the investor community would appear to have evaporated in the wake of the deal. Five investment houses now have GVC as a buy including Numis which titled its recent note ‘sing if you’re glad to be grey’.

So what was it about this €823m revenue company that attracted you?

Size is important. Ivor Jones at Numis said in his note at the start of February that GVC is now a “big beast” with revenues forecast to jump from €225m in 2014 to €823m in 2016 and EBITDA rising from €52m to €189m over the same period. As GVC has grown so interest in the stock and its relatively lowly valuation has increased.

But Jones is keen to dispel the idea that concerns of investors over unregulated earnings streams have dissipated simply because of the augmented earnings and says the situation is more nuanced.

“Maybe investors are coming to appreciate that the regulated/unregulated equation is not the same as saying risk-free/risk,” he says. “When you look at what can happen with regulated territories – France and Italy, for instance, and even the UK – then clearly, though they are regulated, there are still risks involved. So it’s really about differing risk profiles.”

A potentially bigger issue, says Jones, comes with the execution risk of GVC attempting to swallow the larger entity and achieve the promised synergies. Lest we forget, we have been here before with the original merger of PartyGaming and Bwin.

Sold as a mega-deal that would set the company up to dominate the European online gaming scene, the coming together of two very different company cultures failed to live up to excessively optimistic predictions both from the clumsily assembled management team and from the supportive analysts.

In its five years as a merged entity, both the Bwin and Party brands were eclipsed in all product categories to the extent that neither was ever as successful as it was before the two companies first waltzed down the aisle. Foreseeable regulatory setbacks (German sports-betting turnover tax, the imposition of VAT, UK point of consumption) bad decision-making (too much emphasis on poker in New Jersey, for instance) and bad luck (having Germany as its only effective ‘home’ market) left the company struggling.

The takeover tussle between 888 and GVC came as a blessed relief for a company that was effectively begging to be put out of its misery. Now the operations are in the hands of new owners who have previously shown themselves adept at corporate surgery. Says Jones of their prospects: “Given the track record of management we expect investors will (be) more confident in at least the delivery of the stated targets as well as the potential for a new commercial approach to drive faster growth on the BwinParty side of the business.”

As with BwinParty’s previous existence, though, regulatory roadblocks can often throw even the best-laid business plans off course. But it might not be Turkey, a risk that, as Jones says, “hasn’t materialised in a decade”. Rather it is Germany where the news last week of further criticism on the part of the European Court of Justice of the country’s state treaty on gambling would indicate the authorities will have to attempt once and for all to get the country’s regulatory house in order.

As Jones points out, this might not be wholly unalloyed good news. “It could be good for GVC, but in the same way that things didn’t go right in France, it could go badly for GVC,” he says. All those buy notes would suggest investors aren’t too worried about the risks right now – ‘let the good times roll’ was the title of another effusive note from Cenkos. Yet black swans come in many guises – and sometimes even with Teutonic accents.

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