Credit Suisse starts Paddy Power Betfair at 'underperform'

“We feel that cost synergies alone are a poor rationale for M&A in a growth industry such as online gaming. Furthermore, we believe that scale is not as important as many believe, and is no indication of potential market share gains.”

Given both companies already had strong brands, high quality management teams and good product/technology offerings, CS questioned the extent of the benefits of the merger.

It attributed the ‘underperform’ rating to the post-merger share price reaction – the stock is up 66% versus the sector down 0.2% –integration risks and limited revenue synergies.

“Although we think there is clear earnings upside potential from the combination, we believe the share price reaction since the merger announcement has been overdone.”

Credit Suisse said the stock’s valuation looks expensive compared to peers, with only 15% of current embedded value of Paddy Power Betfair being generated by cash flows in the next five years versus 29% at William Hill and 28% at Ladbrokes.

The bank’s forecasts for the merged entity include 2.4 percentage point of UK market share gain over the next five years and 3 ppt of underlying group EBIT margin enhancement, neither of which it sees as conservative.

At 1437 BST, Paddy Power Betfair shares were down 3.6% to 8,990p.