Shares in the world's leading betting exchange Betfair started conditional trading in London on Friday 22 October.

The flotation, in the so called disruptive upstart, went smoothly, with shares in the company opening at a price of 13.00, which valued the company at 1.390bn.

Following the exercise of an overallotment option, by Morgan Stanley Securities Limited, acting as stabilising manager, 49,256,353 ordinary shares in the Company would be held in public hands, representing a free float of approximately 46.1 per cent of the issued share capital of the Company.

Within half an hour of trading, shares in Betfair were changing hands at 15.50, and during the course of the day they recorded an intra-day high of 16.09, before closing back at 15.50.

It was anticipated that shares in the company would remain strong in early trading, following squeezed institutional demand, and this was indeed the case, with the likes of Newsmith Capital Partners, founded by Paul Roy, the Chairman of the British Horseracing Authority and a member of the Horseracing Betting Levy Board, snapping up shares in the company.

At the close of business on October 27, the first day that the retail punter was able to get his hands on shares in the company, shares in Betfair closed down almost 3% at 15.01.

Alas, for Betfair's legion of small shareholders a worst case scenario started to unfold when on Friday 29 October shares in the company fell back to 14.35 a fall of 55p, or 3.69% on the day.

At the close of business on Friday 05 November 2010 shares in Betfair closed at 13.81, their lowest level since flotation. Betfair shares then went into freefall hitting a post-flotation low of 11.40 on 03 December; leaving many of the small retail investors who had bought in at the top, already nursing a near 20% loss.

On 1 December 2010 the Daily Telegraph reported; "Having been brought to market in October at 13 a share, Betfair closed below its float price for the first time as Morgan Stanley initiated with an ?equal-weight? rating and a 14.80 price target, while Goldman Sachs began coverage with a ?neutral? rating. Another adviser, Barclays Capital was equally lukewarm with a 13.60 price target. The three banks were amongst the brokers and law firms who trousered 15.7m in fees at Betfair?s much-trumpeted listing."

On 2 December 2010 Liberium began coverage on Betfair and wrote; "Betfair is overvalued ? SELL, 10.50 target price. Betfair's growth is strong (24% CAGR in EBITDA from FY10-13), but this partly reflects a fall in profit in FY10 (CAGR is 12% using FY09 as a base). Part of the growth comes from more commoditised areas, and higher risk non-regulated markets. The yield is almost non-existent (<1%), and the excellent growth rate is clearly not a secret, reflected in a CY11 PE of 33x and EV/EBITDA of 15x (pre non-core loss makers)."

When issuing its results for the six months ended 31 October Betfair said that race meeting cancellations had moderated overall growth rates in the quarter to date, whilst poker continued to show "significant year-on-year declines". Betfair reported revenue growth of 11.3% to 167.2m (H1 FY10: 150.1m), which comprised revenue growth of 22.3% in Q1 driven by World Cup, followed by paltry growth of 1.6% in Q2. The company raised concerns that it may be impacted by the economic downturn with the following statement; "In Q2 FY11, revenue growth in Core Betfair moderated to 1.6%, with continuing robust growth in football and other sports, as well as Games, but weaker performances in horse racing and Poker. Horse racing revenue showed a slight year-on-year decline in Q2 FY11 due to a reduced level of ARPU from existing customers who, while maintaining their frequency of activity, decreased their average bet size."

Following the publication of these results, and having considered signals from other bookmakers, Liberum Capital reiterated its sell advice on Betfair alongside a new target price of 850p. Liberium said that it believes that Betfair's update to the market on 8 March 2011 will reveal that sales have been hit by event cancellations due to the harsh winter weather and further weakness in the company's online poker business. Liberum continues to believe that the market is also attributing too much value to the company's LMAX CFD financial trading exchange platform, in light of the fact that volumes on the exchange since December have allegedly been poor.

With Betfair shares posting a new all time low of 7.8p on May 18th 2011, many of the company's legion of small followers may well have had the words of former Sex Pistol Johnny Rotten ringing in their ears; "Ever get the feeling you've been cheated?"

They had not been cheated, of course, they had simply failed to see the writing that had been on the wall; or, to put it another way; they had believed the hype.

In the Guardian on Tuesday December 14, an article by Simon Goodley on Betfair contained the following;

"Chief executive David Yu who along with his wife, Philana, cashed in 5.3m of shares in the float ? said: "We have always respected the market to find the right price. Investors have different time horizons. We are building a great business in the long term, although [the share price] has been volatile."

In December 2011 it was announced that David Yu, who had presided over a 500m slump in the value of Betfair since its floatation, was et to leave the company prematurely, while sitting on more than 6m of share options.

Yu could not have made it up ......

To cite this article: "BETSHAM: The story of how the Betfair flotation went belly up." (Author: Niall O'Connor: Published on 2012. All Rights Reserved.)