Betfair loses legal case in Australia

Betfair, the recently floated online betting exchange, suffered its first setback as a public company today, when it lost the latest stage of an Australian legal case which could have increased revenues in the country by 10%. The long-running legal dispute has seen the British company challenge two Australian racing bodies over their decision to implement a 1.5% charge on bets taken on all New South Wales thoroughbred and harness races – a levy that costs Betfair Australia about £2m a year. Today, a Sydney court again ruled for Racing New South Wales and Harness Racing New South Wales against the betting exchange, which now says it will "review its options including a potential appeal to the high court of Australia". Betting industry experts said the news undermines the theory that Betfair's business model is easily replicated in new markets. One said: "Betfair only works when the company is taxed on gross profits rather than revenues and where there is a very sophisticated sports betting market. At the moment, that only applies to the UK and Ireland." The risks of the legal challenge were well flagged in Betfair's flotation prospectus, which noted: "The annual turnover fee claimed by New South Wales racing bodies would be the equivalent of more than half of gross revenue generated from races held in New South Wales, which accounted for approximately one-fifth of Betfair Australia's gross revenue (2009-2010: £19.6m; 2008-2009: £16.9m)." Betfair Australia – which is a 50-50 joint venture with James Packer's Crown empire – remains loss-making, but investors had been hoping the business could become profitable sooner than expected with a successful legal outcome. A note issued last week by brokers Panmure Gordon explored the growth potential of the overall group in which analyst Simon French wrote: "At this stage, it is difficult to accurately predict the growth trajectory of either Betfair US or LMAX [the financial exchange]. However, we believe both have high growth potential and could potentially deliver significant value to Betfair shareholders over the medium term. In addition, we believe Betfair Australia could move into profitability in 2011 depending on the success of its legal challenge in New South Wales." A spokeswoman said Betfair was already paying the New South Wales charges and denied the decision demonstrated the difficulties it might face in expanding overseas. She added: "This is a specific case in Australia. It is a long road in terms of a regulatory point of view for new markets and there will be bumps along that road." Last year, Betfair revenues grew by 13% to £340.9m, although stripping out foreign acquisitions and interest earned on client money, the growth figure drops to 5%, while pre-tax profits slumped by 63% to £17.8m. The group is projected to make a pre-tax profit of about £33m this year. Shares in the business, which floated at £13 last month, lost 11p to close at £14.48 today.