Share premium

Was it a good bet or not? 10 years and £1.4 billion later and the answer seems to be…

Published on: 27 Oct 2010

Although people have been gambling for a long time, the profile of the betting industry has changed dramatically over recent years.

The bookmakers that were seen on many a high street seem to be gradually disappearing.

People are still gambling though but the delivery method of the industry is switching to internet based gambling rather than placing bets at a physical bookmakers.

Ten years ago former professional gambler Andrew Black and former JP Morgan trader Edward Wray started up a betting business that addressed matters in a new novel way.

For years the typical approach to gambling had been where a bookmaker set the odds and it was up to the individual gambler whether or not he or she accepted these odds and placed the bet.

Betfair pioneered the concept of person to person betting whereby individuals bet against each other rather than the bookmaker. Betfair provide the platform for the betting and take a commission on each transaction.

A gambler will say that they want to bet on a certain event happening (or not happening) and if another gambler wants to accept the bet then the transaction goes ahead. Betfair provide the mechanism for this to happen.

This is known as a betting exchange and is a great example of where first mover advantage really counts.

In order for the business model to work there has to be a critical mass of gamblers that are willing to offer and accept bets. Without this critical mass the business simply would not work.

Another example of where first mover advantage has been critical to business success is in online auctions. After all, who are the main competitors to eBay?

Back to Betfair though and it certainly is a good business model. Risk for example, is nicely reduced as the company is not standing to lose on the bet but instead takes a nice commission on each transaction.

So how well has it done over the last 10 years?

The answer to this can be found last Friday when 15% of the company was floated on the London stock market and the company was valued at £1.4bn.

Betfair’s advisors were some of the biggest names in the business and included Goldman Sachs, Morgan Stanley and Barclays Capital to name a few.

Amongst other things their job was to identify the price range of the proposed offer. Initial indications were that it would be between £11 to £14. The final initial public offering (IPO) price was set at £13.

With some of the top investment bankers involved and Betfair being in the gambling industry (which is not necessarily renowned for being generous to gamblers) it was something of a surprise to some people to see the share price rise by nearly 20% in the first day of initial trading after the IPO. After all, this could imply that the IPO was undervalued if there was such an initial jump in price.

I wonder what odds you would have got from Betfair that the IPO share price would rise by 20% on the first day of trading?

Companies Act 2006 Provisions now in force

Published on: 29 Nov 2009

A number of provisions from the Companies Act 2006 finally came into force with the final implementation of the Act on 1 October 2009.

However, the Act has been examinable in the F4 Paper for some time, albeit the examiner has expressed some concern about candidates still answering questions with reference to the old legislation.

It is very important therefore to ensure that your study materials are up to date.

As an example, one of the provisions which has just come become effective in practice is the changed allowable uses of the Share Premium Account.

Use of share premium is now restricted, so that only the premium arising on a specific issue of shares is available to write off any expenses or commission associated with that issue.

It is no longer possible to use an existing balance on share premium to write off the costs of a new issue of shares. Neither is it possible to use the share premium account to write off any formation expenses nor to write off costs/provide for premium associated with the issue/redemption of debentures.

The ExP Group