Power to the Paddy

By Business & Finance
16 February 2012
Patrick Kennedy

John Walsh talks to Paddy Power chief executive Patrick Kennedy about the firm’s stellar performance and why online and international markets are key to its future growth.

Patrick Kennedy is one of the youngest, and in view of Paddy Power’s share price performance, most successful chief executives of companies listed on the Irish Stock Exchange. He has pedigree in this respect: His father was David Kennedy, former chief executive of Aer Lingus. But Kennedy doesn’t really fit the traditional mould of a corporate bigwig. For a start he is very rarely found in a suit. Neither does he have the air of organised panic associated with many of his pinstriped brethren.

When Business & Finance caught up with Kennedy at the company’s new headquarters – the appropriately titled Power Tower in Clonskeagh – he casually strolled into the boardroom bedecked in an open neck shirt, a pair of corduroy trousers and armed with a stack of papers.

But then again the facts speak for themselves. When Kennedy took over from John O’Reilly as Paddy Power chief executive in January 2006, the share price was hovering around €12 per share. At the time of going to print, the stock had climbed to €43 per share. And that was over a period when the Irish economy went into meltdown and the Iseq index shed over 70% of its value, interim dividend has also grown 33% each year over this timeframe.

Paddy Power’s headcount has doubled from 1500 to 3000 since 2007. And it is still growing. Another ten people had joined the company the morning this interview took place. Pre-tax profit for the financial year 2005 was €31.3mn compared with a pre-tax profit of €111.3mn for the financial year 2010. This piece came out just before the 2011 results were released.

More importantly, Kennedy’s leadership has seen a radical transformation of the business. To most people, Paddy Power is a chain of betting shops, with its bright green façade, dotted across most towns in the country. But over the past few years there has been an internationalisation of the business. It has partnered or acquired businesses in Canada, the UK, France, Bulgaria and Australia as well as online operations in over 150 countries.

Even though it is now possible to bet on everything from horseracing to the timing of a break up of the euro, how these bets are placed has massive implications for the sector.

There are now three distinct trends in the industry: Retail, online and mobile, which includes the move into smart phone and tablets.

The traditional over the counter market has come under serious pressure in Ireland over the past few years.

In 2007, the retail division posted a profit of €35mn – that was down to €5mn in 2010. “Ireland has declined quite substantially. Retail has been very tough,” says Kennedy. “But we have managed to diversify and move outside Ireland. Over 80% of our profits now come from online and 75% of our profits come from outside Ireland.”

But it would be wrong to think that future expansion will come from online and mobile at the expense of retail. He says retail is growing in the UK, albeit from a low base of 2% of the overall market. “We opened 40 shops in the UK in 2011. That puts us among the top five expanding retailers in the entire economy along with Costa Coffee and [the pub chain] Weatherspoons.”

But the Irish market remains “very challenging”, he says. “Ireland remains a very tough market. There have been over 250 shop closures over the past four years. It really depends on the economy, but if consumer spending remains under pressure, then there will be more closures.”

The tax treatment of the betting sector will also determine the sector’s fortunes in this country, he adds. In times of austerity, such as these, governments look for the lowing hanging fruit to raise taxes. Alcohol and cigarettes are obvious targets. Betting has come on the radar of politicians over the past few years. There is a 1% tax on retail bets placed with bookies in this country. There is a possibility this levy could be raised. Kennedy says that would be a mistake. “The industry has shown that it has quite a sensitivity to the economic environment. The Irish market is down 30% over the past four years. I think there is a realisation that price levels and tax levels do matter and drive consumption. The profitability in the overall Irish retail market in 2011 was roughly €20mn on a turnover of €3bn so that is less than 1% of operating margin. So if the tax is changed from 1% to 2% as some people propose that would wipe out the profitability overnight and it would decimate the industry. How many shops would close then?”

He argues that what the industry needs is certainty over tax regime. The government will publish legislation on taxing online betting before the Dáil breaks for the summer. Kennedy says that it is very important that new legislation does not discriminate against Irish companies. “All governments need to make sure that if they put tax and regulation in place, then they enforce it properly and they do not give advantage to companies that are offshore and we would be very mindful of that in Ireland. We will pay the tax but the government has to make sure that it is a level playing field and advantage is not given to offshore companies who will try and circumvent the rules.

“The sector is a very significant employer, particularly online, so there has to be a balance struck between level of tax, level of employment and level of enforcement. One of the big challenges we see is that of the top ten online bookmakers providing services to Irish customers, eight are based overseas so it is really important that whatever is done from a taxation point of view does not penalise the two Irish companies because it will give advantage to eight offshore firms who do not pay tax here.”

He says the same applies to the UK, where the government is conducting a review of the online betting industry, with speculation that it could introduce a tax of between 10%-to-15% on the industry.

Kennedy knows of companies who looked at investing in Ireland but were put off by uncertainty over the online betting tax regime. Along with a number of other vested interests he has made submissions to the government. He does not expect betting tax to become a political football, he says. Moreover, he argues that the link between betting taxes and direct support of the horse racing industry is an “unhealthy structure” and he would like to see it removed.

Online ahoy

In 2008, there were an estimated 1bn people online. By 2010 the rate of connectivity had reached 2bn. The global betting and gaming industry is a $375bn market. Interestingly, only 9% of that total comes from online. That is obviously set to grow.

Over the past few years Paddy Power has made a number of acquisitions. It snapped up Sportsbet, for a total outlay of €155mn, to get access to the highly lucrative Australian market. The firm entered into a partnership with the French company, PMU, the largest betting organisation in Europe, to manage the pricing and risk of its French online operations. Before Christmas it announced a three year deal to supply the product, risk management and pricing services to the British Columbia Lottery Corporation’s online betting business. Paddy Power is now the leading player in the UK mobile betting with a 30% share of the market. It also bought a Bulgarian technology firm, Cayetano, to support and develop its online operations.

Is it now a case of consolidating for a few years? “We operate in legally regulated markets and with the benefit of hindsight that has proved to be the right strategy. However, as markets legalise and regulate, we have to look at them. Therefore we should not be retrenching and consolidating. The imperative is on growth. Paddy Power is investing heavily in people and technology to ensure that it stays ahead of the pack.”

As of November 2011 the company has a very healthy net cash position of €96mn excluding customer balances. “Our strategy is to maintain a conservative capital structure so as to give us flexibility for future expansion.”

There has been a trend among the larger Irish corporates to move corporate finance activities overseas. Paddy Power recently hired Credit Suisse as a corporate broker. Could this presage a gradual shift in key operations to other locations?

“I would like to think that the nerve centre of Paddy Power would remain in Ireland. Yes we are expanding overseas. We live in the real world. We are a global business and our competitors are global. We obviously look at all the pressure points in the business. We look at the availability and pool of talent and the price of that talent. We also look for certainty. We need certainty on the tax regime which is essential for long term planning.

“But the default of our planning, even as we expand internationally is that the nerve centre stays in Dublin. I would feely very strongly about that. We are fully committed to Ireland.”

Paddy Power now employs more people in Ireland than Google or Microsoft. CEO Patrick Kennedy’s commitment to keeping the company’s nerve centre in this country will be welcome news for the government. The image of Ireland Inc took a hammering during the economic meltdown.

Kennedy says that investor confidence is being restored. “Our reputation is stronger now than it was a few years ago. People are looking at us and seeing how we are improving our competitiveness. The IDA is doing a great job of attracting companies: seven of the top ten technology companies are here.

The future of the economy hinges on exploiting opportunities the high end global services market will present in the future, he says. “If service businesses globally can be built from anywhere then what becomes important is your skills base and connectivity.” He adds: “From a connectivity point of view Ireland is low and slow. But the government had a “broadband 21” [Fine Gael’s NewEra strategy calls for a €1.8bn investment in broadband over the next few years] strategy published last year so that will now be implemented.”

Patrick Kennedy was educated in Gonzaga College, University College Dublin where he received a B.Comm, the UCD Michael Smurfit Graduate Business School where he graduated with a diploma in Professional Accounting and Trinity College Dublin where he received a diploma in statistics. He became a fellow of the Institute of Chartered Accountants in 1994.

Married with young children Kennedy is a sports fanatic. Before joining Paddy Power, Kennedy was CFO of Greencore Group plc and has held positions at KPMG and McKinsey and Company. Kennedy is also a non-executive director of Bank of Ireland plc and Elan Corporation plc.