RSS feedsIn today’s world of the strategic FD, it’s sometimes refreshing to talk to a traditional, penny-pinching, profit-focused finance director.
Meet Simon Lane. As group finance director of William Hill, the FTSE-250 betting company, Lane is responsible for the finances of an organisation with revenues of almost £900m. In 2006, William Hill’s punters gambled more than £13bn with the company.
But despite the huge amounts of money being spent with the group, there are no illusions of grandeur. It’s corporate HQ is a rather drab looking building in Wood Green, North London, and it’s clear that little cash has been frittered on either comfort or image. In many ways, the HQ is a mirror of its business – no nonsense and functional. William Hill himself would have been impressed.
Lane also finds it refreshing; to come to a company where he finds himself challenging the marketing team about whether they are spending enough money. “Normally it’s the other way around,” he says. “The marketing professionals are ever so keen to spend money. But in this business, I think its culture is very profit-focused, very cost-focused.”
While he concedes that, to some extent, this makes his job easier, he is also quick to point out that although marketing spend isn’t currently central to the company’s strategy, he must be sure that this is the right strategy. “What I’ve got to do is make sure that it’s not just myth and legend; it’s borne out of facts and that we measure and track performance on that basis,” he says. “The culture is the key thing, you’ve got to underpin it and make sure that it sticks and that you’re challenging and measuring it and not assuming anything. That’s one of the things I’m doing, is making sure we’re tight on costs… we’re tracking it period by period versus last year.”
Attracting punters
While he classes the gambling industry as a retail operation, he says that it’s
difficult to apply the fast moving consumer goods model to William Hill. “In
terms of gambling, you either are or aren’t a punter,” he says. “And you’re
unlikely to walk past one betting shop to go to another unless there’s a real
point of difference. So, spending a lot of money advertising; making people
drive for hours and hours trying to find a betting shop isn’t going to work.
That’s why we don’t spend a lot of money trying to persuade people on the street
that they’re a punter.”
Instead, strategy centres around “location, location, location” and making sure they give a better service than the competition, because the product on offer is almost exactly the same. “You’ve got to make sure you get the best share within a 10-minute walk of your shop,” he says.
The gambling industry is a strange one, and Lane says it can take a little time getting used to the dynamics. He has very little control over day-to-day income, which can vary quite markedly. And while there is an averaging effect spread out over the 400 to 500 million bets the company takes a year, it still makes planning and control rather difficult. This is especially true when you consider the unpredictability of sport. As Lane says, “We’re down to the vagaries of results. In reality, day-to-day, there isn’t a lot you can do if Kato Star wins or Arsenal draws,” he concedes. “Under those circumstances you want to know that your costs are under as good a control as they can be. Particularly if you have a run of a few days.”
So far, the strategy seems to be working. When the group floated on the London Stock Exchange just over five years ago, its shares were offered at 225p. Today, they change hands for almost three times that; and in the past three or four years the company has returned about £650m in the form of dividends and buybacks. “The share buyback is part of an efficient balance sheet management policy. So that starts with asking how we can optimise or, to an extent, minimise, the cost of capital to the company. And that looks at the share between debt and equity.”
As a result of this strategy, William Hill decided that it could reduce the cost of capital by gearing up to a level of three-and-a-half times cash earnings. “It’s all about getting more debt into the business, an appropriate level of debt, which is not pushing the risk profile up hugely. But because it gets tax benefit, you’re taking advantage of that.”
Foreign expansion
The company is using the debt to fund development of its domestic business, but
also to investigate foreign expansion (particularly in Spain, Italy and,
potentially, Greece) and to develop its online business. Any cash that’s left
over from debt is combined with the cash left from normal operations and
returned to shareholders. Recently, its preferred method of doing so has been
through buy backs, rather than a big dividend.
Lane says the reason he has gone for the buy back approach is that it affords the company flexibility. “It means that we’re not locking ourselves into something that we’ve then got to beat each year,” he says. Of course, some might feel that a disadvantage of the buy back approach is that it means the company will not grow in terms of market cap. But this isn’t something that bothers the William Hill board – egos, it seems, are pretty small in the gambling sector and both William Hill and Ladbrokes sit at around the 120 to 130 point in the FTSE index.
Competitive edge
Having a competitor like Ladbrokes, which is so similar to William Hill, is
both an opportunity and a curse. “We’re fiercely competitive, and it’s quite
unusual to have such a close benchmark,” says Lane. “When those results come out
from Ladbrokes there are loads of people trying to work out whether they’ve got
their nose ahead in their particular part of the business. Within reason I think
having a competitor and analysing them is a healthy thing as long as it doesn’t
become an obsession. And when we nudged ahead in terms of profit at half year
there was a really huge uplift in the company.”
Make no mistake, the growth that Lane is interested in is profit – and while he must keep an eye on revenues, cash is very much king.
One of the main problems that Lane faces, however, is that the gambling industry in the UK is extremely mature. William Hill has around 2,250 betting shops across the country, which account for about a quarter of the domestic market. Any further growth through acquisition is nigh on impossible without attracting the unwanted attention of the Office of Fair Trading.
So while the group has made a couple of small acquisitions in the past year, which came in under the OFT’s radar, long-term sustainable growth must come from elsewhere. “It’s about service, maximising the product range and then working the estate to make sure that we’re continually improving – so there’s a degree of refit activity. We take each location and work out what you can do to maximise the potential,” he says.
It’s a sound lesson in looking inwardly for opportunities rather than externally – the fact that William Hill is hampered from serious acquisitive growth in the UK due to regulatory attention forces Lane to look elsewhere for opportunities. “We think there’s about 500 development opportunities sitting on [our] estate, so about 20-25% of the estate is capable of being improved through development activity.”
As well as upgrading some of William Hill’s 2,250 premises, which include 180 acquired from Stanley Leisure in 2005, Lane sees the internet as an excellent area for growth. He said that online poker had, up until October last year, seen growth rates of 40% to 50%.
But this time it was US regulators that interfered, and Congress’s Safe Port Act, which was passed by George Bush last year, had a profound effect on the online gaming industry. In October, legislation forced many internet poker sites to unplug their servers and relocate to offshore jurisdictions. “Once PartyGaming had to pull out, a lot of the liquidity went offshore and some of the guys in [our] room were looking to play with the bigger players that were sitting offshore,” he explains.
But US government intervention was only part of the problem that William Hill faced trying to break into the high-tech world, as Lane points out. “We’ve had some technology issues, one or two systems outages which, if you’re a poker player and you’ve been playing for four or five hours and you’re reset to zero, is irritating.”
Despite this double set back, Lane remains extremely positive about the potential of online gaming – and, true to form, he will not fall into the trap of spending copious amounts of cash on marketing. “We’ve got the most profitable interactive business outside of the US and we have been quite careful how we spend our marketing money, because we’re focused on lifetime value and profit, rather than just renting customers… I think our view is that it’s difficult for us to believe that [direct marketing] pays back.”
Perhaps one positive piece of regulation that will impact on William Hill’s business, is the much debated Gambling Act that will come into force later this year. While it was the sport and culture minister Tessa Jowell’s ultimately failed attempts at clearing the way for so-called super casinos that consistently hit the headlines, the Act will still revolutionise the industry.
For the first time licensed betting shops will be allowed to open in the evenings. It will also pave the way for £500 jackpot machines to be installed in the betting shops which, again, Lane sees as an opportunity.
An example of a positive, business-friendly piece of legislation? Not quite. Lane says that he’s had to oversee the establishment of a new compliance department to cope with the predicted requirements of the Act…
