Market Beat: Investors have rightly learned to fear results day at Paddy Power Betfair

Paddy Power Betfair chairman Gary McGann was unfazed two years ago when a lucrative executive bonus scheme was met by a mini shareholder revolt at the group's first annual general meeting as a merged entity.

As almost a third of investors polled on directors’ pay voted against the resolution, McGann insisted the bookmaker had succeeded in retaining top talent and that “significant shareholder value has been created so far, with the company set for significant future success and shareholder value creation”.

If only. The market value of the group has fallen about 45 per cent from the €11.9 billion peak reached on the day the deal closed in early February 2016. Investors have rightly learned to fear results day at the bookmaker, with the stock routinely slumping as the market digests its figures and outlook.

This week’s trading update proved no exception, with the stock tumbling as much as 8 per cent on Wednesday as first-quarter revenues fell short of expectations and it guided full-year earnings expectations down.

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Punters in Ireland and Britain kept their money in their pockets following a sustained period of “bookmaker” friendly sports results between November and February and a high level of horse races being cancelled because of bad weather.

And while revenue increased in its Sportsbet business in Australia – which accounted for almost a quarter of group turnover last year – earnings growth was dampened by “adverse” sports results.

"What began as a combination of the online market leader Paddy Power with the fast-growing disrupter Betfair, led by the biggest industry heavyweight, has failed to deliver on the lofty ambitions that investors envisaged," according to David Holohan, chief investment officer at Merrion Capital.

“Add in several significant management overhauls, the inevitable internal disruption and the company appears to be a shadow of its former self in terms of growth prospects, set against a more adverse regulatory backdrop.”

McGann, who has had to oversee a management overhaul at Aryzta since he became chairman of the troubled baked goods group in late 2016, has also had his hands full with managing defections of senior staff at the bookmaker in recent times. (Both stocks, incidentally, count among the main five laggards on the Iseq so far this year – down 45 per cent and 21 per cent, respectively.)

Breon Corcoran, the former Paddy Power chief operating officer-turned-Betfair boss and architect of the merger, took over the helm of the new group. But he prompted a share price slump when he quit last August.

Chief financial officer Alex Gersch triggered another wobble in March when it emerged that he too had handed in his notice.

A reminder of the tough regulatory environment in the main markets in which it operates came last week when it emerged that the UK government planned to cut the minimum stake on fixed-odds betting terminals (FOBTs) to £2.

With investor trust in Paddy Power Betfair at a low point, the board seems to believe that the market is undervaluing the group, having just signed off on a plan to buy back as much as £500 million (€566.4 million) of its own stock over the next 12 to 18 months.

Mopping up and cancelling more than 8 per cent of the stock (based on current prices) will boost earnings per share (EPS), a key performance gauge for customers and, happily for top executives, the main driver of awards under its long-term incentive plan.

But will it be money well spent? Greg Johnson, an analyst at Shore Capital in the UK, thinks not. Downgrading his recommendation on the stock to outright sell during the week, Johnson said that the market has fully factored in the group's slower growth and potential headwinds.

SMURFIT KAPPA

Meanwhile, a number of hedge funds that piled into McGann's old stomping ground, Smurfit Kappa, in recent times to play the merger arbitrage game are also said to be feeling the pain.

Shares in the cardboard box-maker – where McGann served as CEO between 2002 and 2015 – have fallen almost 6 per cent from their highs last month as hopes have begun to dwindle that the group's unwanted US suitor, International Paper (IP), will come back with a third offer. (The stock is currently about 9 per cent off the current value of the last IP stock-and-cash proposal.)

Smurfit chairman, Liam O’Mahony, reiterated at the group’s annual general meeting in Dublin on Friday that two takeover proposals from IP so far this year “failed to value the group’s true intrinsic business worth and prospects”.

One wonders whether McGann, who has €15.3 million of his own net worth tied up in Smurfit Kappa stock, based on figures in the group’s 2017 annual report, agrees. But even if the stock price came back a bit if IP walked away entirely, he’d still be sitting on a spectacular return compared to the €425,900 value of his holding in 2008 when it was hard to get anyone to look at the stock.