Paddy Power’s proposed merger will face competition hurdle from regulators

Paddy Power can trace its roots back to when a young draper's assistant, Richard Power, set up his own bookie's pitch at Tramore races in Co Waterford in 1896. A proposed merger with rival Betfair means the business that began with Power shouting odds at punters from a tea chest is on the cusp of becoming one of the biggest players in the global gambling industry.

The merged entity – Paddy Power Betfair plc – would have revenue of €1.5 billion and about 3.5 million active subscribers to its online businesses along with regular customers in its 580-plus bookie shops in Ireland and Britain. At yesterday's closing prices its total value would be greater than €7 billion. It would have businesses in the US, Europe and Australia.

In a note released yesterday, Davy analysts David Jennings and Robert Stokes said it would be the world's biggest listed gambling company and predicted that post-merger revenue could be around €2 billion. That would put it behind the €2.8 billion estimated for the recently- agreed Ladbrokes-Gala Coral tie-in, but well ahead of the €900 million likely to be generated by the proposed Sportsbet- Bwin Party marraige.

Yesterday’s statement pointed, as key drivers, to the merged entity’s scale and the likely savings that would result. Paddy Power chief executive Andy McCue would not be drawn on whether it would result in job losses but stressed a deal would provide the basis for further growth.

Jennings and Stokes suggest there is scope to cut costs by removing duplication, indicating some jobs could be lost following a deal. They also argue that an exchange of expertise between the two could help boost revenue.

They base this on their differences. Paddy Power is a bookmaker whose customers bet in the traditional way. Betfair is primarily a betting exchange, matching punters who want to bet at particular odds with others offering those odds, and charging whichever side wins a commission.

Partly because they are limited in what they can say, neither Paddy Power nor Betfair offered any other rationale for the deal beyond size and savings. McCue said his company did not need to merge, while Betfair released results showing revenue grew 15 per cent to £135 million in the three months to July.

While it could be argued that a betting exchange and a bookmaker complement each other, the opposite could also be said. It is not clear either if a deal would result in better value for customers. It couldgive the merged entity more firepower to develop more and better betting products, but that does not necessarily add up to better value.

The fact that this is the latest in a number of proposed mergers in the sector means that ultimately there are likely to be fewer players and less competition in the market. Regulators here and elsewhere will have to weigh up whether that aspect of the proposed transaction is good for punters. That is just one of a few hurdles that any deal will have to cross before reaching the finish line.