Coming Soon - LMAX (Tradefair)

From the Wall Street Journal:

By WILLIAM LYONS And JAVIER ESPINOZA

David Yu is in his element. The chief executive of U.K. online betting company Betfair is standing in front of a digital presentation re-running this year's Cheltenham Gold Cup. Four horses: Imperial Commander, Kauto Star, Cooldine and Denman are being tracked in a digitized bar chart that shows their odds throughout the race. It's a slightly surreal experience as the race is being relayed in slow-motion. Even more so as Mr. Yu, whose background is in the dot-com world of Silicon Valley, has no real interest in the race. His interest is in the platform.

"I think this is Britain's greatest dot-com success story," he says pointing to one of the many price indicators showing the live trading on the race. "On the surface we are very much a betting company, but what I see is a technology business. When I think about the business we wouldn't be here today if it weren't for the technology platform. Like other great internet businesses, whether it is Amazon.com Inc., eBay Inc. or Google, they all rely on their technology platform. Technology is at the core of this business."

Attention turns to the race as the favorite, Kauto Star, makes a mistake at the eighth fence. Immediately, his price falls as the odds on him winning drop. This is Betfair's unique selling point: the ability to allow punters to bet after a race has started right up to the finishing line. It has revolutionized betting on British horse racing and enabled the company to grow from one that took just 36 bets at its launch in June 2000 to one that now processes more than 5.5 million trades a day—more than on all European stock exchanges combined.

"Ten years ago, betting was a really inefficient market and was not a good deal for customers," he says. "The prices were inefficient; there wasn't the chance for customers to express their view on what the real value should be. There wasn't the ability to bet in play and there was nowhere to trade your positions.

"We changed that by inventing the exchange. A lot of people who were quite sophisticated and knowledgeable about sport were sitting on the sidelines because there was no facility for them to bet into. Now we have more than 1 billion page views per day and on average £3,000 is deposited every minute via our site."

Later this year, Betfair will move beyond the world of sports betting and into finance, with the launch of LMAX [London Multi-Asset Exchange], a financial trading platform that will allow punters to trade on the movement of a company's share price without actually owning the underlying stock.

Based in London, LMAX will hold a separate management team under the direction of Chief Executive Robin Osmond, a former senior investment banker.

Mr. Yu says the launch of the financial exchange, of which Betfair is the majority shareholder, fits the company's long-term goal of diversification. "We have built a high-performance, highly reliable transaction engine and we have applied it to sports betting." The LMAX business, he says, "is going to be bringing those advantages into the financial trading world so we can extend the use of our core platform into other domains over time."

Betfair, which is privately owned, chose to publish its results earlier this year, posting a 29% jump in earnings before interest, tax, depreciation and amortization to £72 million in the year to the end of April, from revenue up 27% to £303 million.

It was the decision to publish its results that helped fuel speculation the company is preparing to float on the London stock market, joining a sector that already boasts PartyGaming, 888 Holdings and Sportingbet. It would also provide a large pay-out for its founders, Andrew Black and Edward Wray, who hold a combined 22.5%. Japanese telecommunication company SoftBank owns a further 21.5%, with the rest owned by private equity, private investors and employees.

"There was a lot of noise on their prospective IPO early this year," says Nicholas Batram, a gaming industry analyst with KBC Peel Hunt. "Cash generation is very strong and they have no debt. The market is a distinct possibility for Betfair."

"I think the rumors have been going ever since I started," says Mr. Yu. While he is reticent on the subject of a potential IPO, which analysts say could happen as early as this year, he doesn't dismiss it outright.

"If we think that it [an IPO] is the right thing for us then we will certainly consider it," he says. "We are in a great position because we do not have to go public. The company has no debt and is very cash-generative. We have a very strong balance sheet, therefore a lot of options are open to us. But we will continue to look after our shareholders, their best interests and monitor the market at all times."

An IPO would also rule out a move offshore. Betfair has tentatively suggested in the past that it might move all its operations to Malta if the disadvantage of paying tax in the U.K. worsened.

"If a company is offshore they pay less tax but can still advertise and still address the U.K. market just the same way we do. So it [being based in the U.K.] does in its current framework put us at a commercial disadvantage," Mr. Yu says.

At present, offshore gaming companies can target U.K. gamblers online and not pay U.K. tax. Betfair is lobbying for a change in the law so that every company that provides betting to U.K. gamblers has to be licenced and therefore pay U.K. tax.

"So we embrace regulation. We think it is good for the industry," he says. "Italy is a good example. Not that long ago Italy was trying to prohibit online gaming, now the government has a licensing framework for betting companies that want to enter Italy.

"The government found the best way to control and regulate consumers is to have a well-regulated framework. We want a regulated environment because it is then a level playing field and it ensures companies can operate fairly and consumers are protected."

One option for developing the business in the U.S., a market with which Mr. Yu. is familiar, as he grew up in Silicon Valley and started his career in technology working for start-ups before AltaVista brought him to the U.K. in 2000.

Last year, Betfair bought an interactive horse-racing betting business, TVG, for $50 million, a move spurred by renewed hope that U.S. lawmakers will lift the ban on internet betting. In July, the financial services committee voted by 41-22 to approve a move to repeal the Unlawful Internet Gambling Enforcement Act, paving the way for legal gambling in one of the world's biggest potential markets.

"The U.S. is an interesting market as it develops," Mr. Yu says, noting that TVG's business — online betting on horse races — is the only legal form of internet gambling in the U.S.

But he insists that though there is potential in markets such as the U.S. and Asia, there is still enormous growth left in the U.K. and Europe, away from the traditional sports like horse racing.

"Horse racing is such a deep, traditional sports betting model," he says. "But what we are seeing is that more people are coming in and having their first bet on football as the game expands globally. Over time, football could certainly be bigger than horse racing."