Is Financial Spread Betting Gambling?

By Dominic Walsh

Monday, 30th March 2009

Conor Foley is living proof of the adage that the bookmaker always comes out ahead. The Irishman lost his “shirt, trousers, shoes, everything” in 1999 when France beat New Zealand in the semi-finals of the Rugby World Cup, and so chastened was he by the experience he decided to give up his career as a futures trader and set up his own betting business.

It was a canny move. WorldSpreads, the company he founded the following year, has grown to become one of Britain's leading financial spread-betting groups, and Mr Foley's 18.1 per cent stake in the company, which has a dual listing on AIM and the Irish Stock Exchange, is worth £4.5 million.

Despite his subsequent success, it is clear that talk of that semi-final, when France turned a 14-point deficit into a 12-point win, still brings back painful memories. “A few of us had strong opinions on New Zealand winning the tournament and we put our money where our mouths were. We learnt a harsh lesson and decided we might be better off the other side of the fence.”

Mr Foley admits that he had been quite a heavy gambler. He says his decision to set up Ireland's first sports spread-betting business with Brian O'Neill, a former fund manager with Irish Life and fomrer colleague at Paribas, was inspired by his losses that day, although it was the technology boom that gave him the confidence.

“The internet was the catalyst. We realised it was easy to accommodate 1,000 bets a day as opposed to 100 bets a day. We built our own online sports spread-betting platform from scratch with a couple of IT guys. That was a very exciting first couple of years when we saw the good, the bad and the ugly of setting up your own company, from short-term cashflow difficulties to getting your pricing wrong on matches, to recruiting the right staff.”

It was three years before the business was profitable, longer than hoped, but that provided the confidence to branch out into financial spread betting. It raised €2 million to back its expansion plans, a move that brought in sporting backers including footballer Kevin Moran and golfer Paul McGinley.

The company later raised a further €3 million, this time in mezzanine finance, but it was quickly repaid out of the group's strong cashflow and today it remains entirely debt free.

Not that the switch of focus was a smooth one. With the advent of an office in London in 2004, manned by traders poached from Finspreads, a rival outfit, the company decided to target super-rich punters. “But we didn't manage to attract those clients, who had strong relationships with other companies,” Mr Foley says.

The setback precipitated a 180-degree strategy change as WorldSpreads refocused its business on small and medium-sized clients: “We started all over again and changed our personnel. It was painful but now we don't deal with the top end at all.”

Mr Foley believes one of the factors in the group's ability to reinvent itself has been its simple corporate structure. “From the start, everything was transparent — there were no funnies, no offshore entities, no part-owned businesses. It also made the flotation in 2007 a hell of lot easier.”

Were it not for the American crackdown on internet gambling, Mr Foley might have ended up selling rather than floating the company. A year earlier he had started talks with Sportingbet, the internet bookmaker, about a bid valuing WorldSpreads at up to €60 million, with €20 million upfront. “It looked a neat fit. The one element of the betting industry that Sportingbet wasn't in was financial spread betting. We had agreed terms, then the day were going in to finalise things — we were actually in the lift to meet the other side — we got a text to say the Sportingbet chairman Peter Dicks had been arrested in the US. That changed everything.”

Today, the financial markets account for 98 per cent of WorldSpreads revenues and Mr Foley is close to selling the sports business to a management buyout team.

The unprecedented volatility of the markets, especially in the banking sector, has played into the hands of the spread-betting firms, although Mr Foley is cautious about the impact. “People tend to trade more when markets are volatile, but they also tend to lose more. We're indifferent on whether markets go up or down — all we want is clients trading.”

He says the company is recruiting about 300 new clients a week although the amount they are staking has come down from £10 two years ago to about £7. He admits that the Irish banking crisis has had a big effect on its Irish punters.

Although the focus on smaller punters means few bad debts, it is one of the reasons why WorldSpreads, which derives 75 per cent of its business from the UK and Ireland, is focusing on overseas growth. In addition to London and Dublin, the group has offices in Malaysia and Greece. It has a strong presence in Spain and is moving into Latin America with its

Spanish partner. It has joint venture agreements with partners in Germany, Austria, Hungary and South Africa, and is targeting regions including the Baltics, Serbia, Poland, Russia and the Far East.

“I'd say that, within the next 18 months, international will account for half the business,” he says.

In December, WorldSpreads signed a so-called white-label deal with Victor Chandler International, the bookmaker, that gave it access to a large international clientele, and Mr Foley hints at further such deals.

Despite the failure of the bid talks with Sportingbet, Mr Foley admits that a takeover by a bookmaker cannot be ruled out. “It's not something we're considering right now.

We've still got a lot of things we'd like to do before we think we could realise the appropriate value, such as moving into online forex and futures and options trading.”

He admits that he maintains a “terrific relationship” with Sportingbet management — its founder Mark Blandford took a small stake in WorldSpreads at flotation — but there is another intriguing possibility.

I ask whether he knows Patrick Kennedy, chief executive of Paddy Power, Ireland's biggest bookmaker. “His wife and my sister are best friends. I see him quite frequently. He's a very, very good guy. We're in regular contact. They have a tie-up with London Capital Group, but at some stage they may get involved in this industry as a principal.”

The odds on such a deal are probably considerably shorter than they were on France beating the All Blacks in that fateful semi-final in 1999.