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By Gísli Eyland

The purpose of this and future articles is to identify and open up a discussion on current special situations in sports and wellness industries. Special situations in this case are defined as (1) events that affect stakeholder incentives or (2) events that lead to resource conversions (as defined by Whitman), such as bankruptcies, changes in control, spin-offs, recapitalisations etc. In this article we discuss catalysts that affect the equities of The Greek Organization of Football Prognostics (OPAP).

The Greek Organization of Football Prognostics (OPAP)

OPAP (GOFPY.PK) is the exclusive operator of sports betting and numerical lottery games in Greece, with a license agreement that is due to expire in 2020. With a market cap of about €4.1 billion, OPAP is Europe's biggest gambling company with 51% of the equity floated freely, 15% held by management and the remaining 34% held by the Greek government. OPAP shares trade on the Athens stock exchange but are available OTC in the States (half shares).

A few detailed valuations of the company are available online. Matt Pauls & Alex Tabatabai of Fernbank Partners posted an analysis of OPAP on Seeking Alpha in September and Eric Hagemann published an article in the Graham & Doddsville XI issue of winter 2011. ATE Securities of Athens published an analysis of OPAP on the 24th of March 2011. The valuations range from €19 to €25 but I found the ATE Securities FCFF analysis particularly interesting, as it seemed to be conservatively done, using a WACC of 10.5% (11.5% for the residual value) and a negative forecasted FCF growth for 2012 and 2013 (and perpetual FCF growth of 0.5%). Another interesting document is an open letter from the aforementioned Pauls & Tabatabai to the Greek finance minister, Giorgos Papakonstantinou. Although quite biased, they point out how the government could significantly increase the value of company (with Fernbank as a collateral beneficiary).

OPAP´s business is one of high quality, as its operations have some very appealing characteristics:

  • It´s operating in a monopolistic environment (through a license which it holds until 2020 at least)
  • It has very low capital requirements (historical capex is less than 1% of revenue) - Exceptional returns on equity and no debt (average ROE of about 90%)
  • It distributes nearly all of its earnings to shareholders (historical dividend rate is about 90% of earnings)
  • 90% of costs are variable and move in line with revenue
  • No inventories
  • Average life of accounts receivable is 3 days (Annual Report, p. 14)

The Greek financial havoc has had and will have several implications for OPAP:

  • Greek consumer spending has diminished
  • Austerity measures have called for tax reform
  • Online gaming will be legalized and regulated
  • The Greek government will forced to dispose of prime assets, amongst others its OPAP stake

To sum it up, OPAP´s situation is a combination of the following factors:
1. Depressed market prices: Currently OPAP shares are being priced in the market as a 10 annuity with no continuing value.
2. Quality operations: For the reasons stated above, the company operates a high quality business and is likely to distribute a large quantity of its earnings back to shareholders on a regular basis (you'll get paid for waiting).
3. Evidence of resource conversion: The controlling shareholder (the Greek Government) has publicly announced a planned asset disposal in 2012 but at the same time it is in a position to significantly increase the value (compared to current market prices) of these assets before the disposal.

Appendix: Miscellaneous commentary

ATE Securities: OPAP, New Tax Law positive effect combined with legislative prospectsfor the gaming market

The Greek Finance Ministry has already submitted the new draft law to the parliament,scheduling VLT licenses to be granted via an international tender with the exception of any rights that may arise for OPAP due to its monopoly agreement with the Greek State. Each market participant will be able to acquire only one license, but in case some of the licenses remain unsold, the rest of the terminals can be evenly distributed to those who have received licenses. Tax charges stand at 30% of gross gains and will be handed on a quarterly basis. Further, a 10% tax on players’ gains will be imposed both in VLTs and Internet betting, while the minimum payout is set at 80%.

ATE Securities: OPAP, New Tax Law positive effect combined with legislative prospectsfor the gaming market

Disputes among OPAP and other international gaming intermediates have yet not resulted in any harmful operating results for the Company; nevertheless, longer term environment in the specific industry is still under on-going restructuring that may prove somewhat adverse for state-controlled providers. OPAP also faces substantial market challenges in the medium-term such as a) the impact of 10% taxation in players’ gains that eventually result to a further shrink in payouts, b) the impact of the smoking ban that was implemented in July and yet has to be quantified in the medium-term, c) the impact of a recessionary domestic economic environment with negative implications for both companies & households, d) possible developments on the regulatory front to derive from EC initiatives, e) the impact of intense competition from internet betting, following its regulatory setup f) the impact of one-off taxation until 2012, g) the outcome of OPAP’s efforts to expand abroad (refreshed by management in its latest presentation of FY2010 results, and h) the medium-term impact of the domestic market’s opening to new gaming products.

Eric Hagemann: The Greek Organization of Football Prognostics

OPAP conducts its business through anetwork of 5,200 bricks-and-mortar agencies throughout Greece and Cyprus. The agencies are mom-and-pop operations run largely at the expense of the dealers, whose only income consists in an 8%commission on gross revenues. They vary widely in size and quality of operations; but OPAP enjoysthe important benefits of paying its agents strictly on commission and foisting expenses such as rent and utilities onto the dealers.

Eric Hagemann: The Greek Organization of Football Prognostics

There is plenty of reason to believe that OPAP’s €900 million operating income run rate will continue to grow. First, Greece is legalizing online betting - reportedly a €2 billion unregulated market - which will allow OPAP to recapture some share from the black market. Second,OPAP is launching new games including virtual horse racing and live betting. Third, Greece is in the process of legalizing video lottery terminals, which OPAP is the only logical player to operate on a large scale. OPAP will likely not be the only operator of VLTs, but thanks to its existing infrastructure and strong gaming-related store traffic, it should capture the bulk of this new market.

Fernbank´s Matt Pauls & Alex Tabatabai: An Open Letter to the Greek Finance Minister

We hold no illusions of the political hurdles in the Republic, the European Union and the International Monetary Fund, which must be addressed to enact such a plan. All of these groups have a pecuniary interest in the Republic maximizing its income potential in its OPAP holding, which in turn will accelerate the loan repayments of the Republic. After reading various media reports and interviews you have conducted, we are confident that we are repeating to you a plan, which you most likely already have conceived.

Matt Pauls & Alex Tabatabai: Investing in OPAP Is Like Betting on the House

An EU inquiry was launched in 2009 into OPAP’s monopolistic status in the Greek gaming market. The Greek government referred this inquiry to the European Court of Justice (“ECJ”). The ECJ has not addressed this referral yet; however, the ECJ has ruled in favor of the Portuguese laws, providing for the State’s autonomous power to govern domestic gaming in its own discretion despite Articles 43, 49 and 56 of the EC Treaty, including European gaming operator, Bwin (Case C-42/07, September 8, 2009, European Court of Justice). There was a similar ruling for a Swedish company by the ECJ. Overall, signs point to the EU continuing to inquire into monopolistic national gaming operators with the hope of slowly chipping away at their monopolies. Also, the EU appears to have a long term desire of taking away from nations their domestic right to regulate gaming. However, it is doubtful this will occur before OPAP’s current contract with the Greek government expires in 2020.

Matt Pauls & Alex Tabatabai: Investing in OPAP Is Like Betting on the House

OPAP’s legitimacy as a legal business sanctioned by the Greek government will attract players of the illegal games. Of course, some people will continue to play the illegal games mainly because the illegal games offer higher pay-outs, but OPAP should expect a significant jump in income from an increased market presence.

The Asian Punter: Greece´s billion betting market

Greece's gaming market is estimated to be worth as much 10 billion EUR a year. OPAP control sports betting (2 billion EUR) and a whole host of numbers games (3 billion EUR) whilst casino and betting on horse racing amount to less than 1 billion EUR. However, Greek punters make up a large part of .com operators' international online casino and sports betting business, whilst plenty more bet with bookmakers in Cyprus. Add to that a flourishing illegal network of domestic bookmakers and tens of thousands of illegal slot machines and it is clear that spending on unlicensed gambling is likely to come close to that going through "legal" channels.

Gaming Zion: OPAP Expects Greece to Vote on New Gambling Laws Soon

In March the Greek government initially submitted a different version of the gambling law to the European Commission for approval. The approval was not given due to the business-unfriendly and anti-competitive structure of the previous law. The ruling party believed that the first draft of the new regulations could have potentially turned Greece into one big casino. No official date for the resubmission of they new version of the bill to EC has yet been given.

The OPAP monopoly will retain exclusive rights for online betting and lottery in Greece until 2020 and the government plans to further extend it by ten more years. Spanoudakis expressed doubts that an open Greek sportsbooks market could shatter OPAP’s monopolistic position.

Yannis Spanoudakis reminded online gambling news in Greece about a similar situation in France: "We have seen in France it has not changed it. Most likely the Greek government is applying this kind of strategy. Open the internet market and eventually maintain the rest under tight control."

A-z Online Casinos: Internet Very Much A Part Of Greek Gambling Monopolys Plans

We are not looking just to become a more cost-effective, productive company, but we are looking to be involved in more business opportunities in Greece, on the internet and outside of Greece, he told the news agency.

The payroll reduction plan apparently does not involve extensive job cutting, although Spanoudakis could not reveal the detail until he had final board approval. However, the arrangements had been negotiated and agreed to by the relevant unions, he said.

Greece's government is currently working on legislation to regulate the gambling market (see previous reports).

Licenses for video-lottery terminals, internet betting and an instant-lottery scratch game are tremendous opportunities for OPAP, Spandoukis said, adding: We are going to fight for them."

Bloomberg notes that last month the Greek government announced plans to sell its 34% stake in OPAP in 2012, call a tender for the national lottery and sell its holdings in land casinos as part of a state- asset sale to raise Euros 50 billion through 2015 to help pay down the country's debt.

The national lottery is an attractive opportunity, while the company doesn't plan to bid for the land casino assets, Spanoudakis said. There haven't been any talks on government plans to extend the company's monopoly on sports betting, currently until 2020, he revealed.

Quentin Toulemonde: Online Sports Betting Industry, A French Perspective (.ppt)

Men are more attracted by online as well as by land Sports Betting. However, Online Sports Betting players show significant discrepancies with other categories. Online players are, on average, younger (45 vs. 30 years old). The typical player’s socio-professional category is higher than in any other kind of activity (considering either land or horse betting).

Online Sports Betting’s penetration rate is quickly increasing (reaching 10.5% of the UK population in 2009) thanks to two main drivers. Internet network’s is getting more and more accessible, with higher speeds, allowing punters to play “live betting”. The offer is expanding year after year: a bookmaker covers, on average, 25 different sports.


Source: OPAP: A Special Situation in the Sports Industry