01/28/2009 12:00AM

TVG sale raises questions


Betfair, the British online betting exchange, does not expect to make any material changes to the operation of Television Games Network after buying the company for $50 million from Macrovision in a transaction that closed late Tuesday, officials for Betfair said Wednesday.

The acquisition has raised questions from within the U.S. Thoroughbred industry about Betfair's intentions for TVG, which operates the largest national account-wagering platform in the United States. TVG also provides live television coverage of racing to more than 30 million homes through cable and satellite providers.

In part, those questions are based on the fundamental difference between the type of wagering offered by Betfair and by TVG. Betfair allows its overseas customers to make bets on a variety of sports and even political events by matching them with other Betfair customers - in essence, every customer of Betfair is a bookmaker. While legal in the United Kingdom, this practice - known as a betting exchange - is not legal in the United States. TVG, on the other hand, merely funnels its customers' bets into commingled parimutuel pools.

Mark Davies, the managing director of Betfair, said in answers to e-mailed questions that he does not see Betfair making any changes in TVG. He said that control of TVG may allow Betfair to make the signals from TVG tracks available to Betfair customers in the United Kingdom, which would bring more value to the British exchange.

"We would like to do so, and we would like to talk to the tracks about how it might work," Davies said.

Betfair is no stranger to North American racing officials. Betfair executives have routinely attended racing conferences to pitch the concept of their betting exchange, which has proven to be enormously popular - and profitable - in the United Kingdom, where bookmaking is legal.

Now the TVG acquisition gives Betfair a foothold in the American market. Several racing officials said they believed Betfair was looking to purchase a regulated American gambling company to begin a lobbying effort to seek the legalization of betting exchanges in the United States - a political longshot that could hold enormous profit potential. But Davies said that Betfair has no intention at the moment of seeking authorization to run a U.S. betting exchange.

The acquisition was attractive to Betfair in a way completely divorced from its main business. According to the company's financial statements, Betfair had $220 million in cash as of April 30, 2008, but the buying power of that cash has been eroding because of the collapse of the British pound. (On April 30, the conversion rate of a pound to a dollar was 1.98, and it is now only 1.43.) So in addition to acquiring TVG, Betfair protected itself against a further erosion in its cash by investing the money in a relatively stable American asset, at least compared to the free-falling pound.

Racing officials said on Wednesday that Betfair bought TVG for a relatively cheap price. In mid-2007, Churchill Downs purchased three account-wagering sites known collectively as AmericaTab for $35 million in cash and $7 million in future provisions. At the time, the sites were generating approximately $175 million in annual handle, whereas TVG will likely post $500 million in handle when 2008 figures are available.

Macrovision, TVG's parent company, had been seeking a buyer for TVG since purchasing Gemstar-TV Guide, the company's former

parent early in 2008. According to several officials who were pitched on the deal, Macrovision was seeking $150 million for the company as late as the third quarter of 2008, when the worldwide credit bubble had just begun to deflate.

The biggest question among racing officials now is how Betfair will treat U.S. racetracks and horsemen. When the company was launched in 2000, Betfair did not compensate racetracks for offering wagers on their races, leading to widespread criticism from the British racing industry. Now, however, the company pays 10 percent of its gross profit from horse race wagering to the Horserace Betting Levy Board, which distributes the money, in part, to racetracks for purses. Davies said that the 10 percent fee is standard among British bookmakers.

The U.S. racing industry is in the midst of a major contraction. Racetracks and horsemen are scrambling for every available dollar, leading to widespread squabbling among tracks, horsemen, and account-wagering companies.

Remi Bellocq, the executive director of the National Horsemen's Benevolent and Protective Association, said that Betfair officials have met with horsemen's groups on several occasions over the past three years.

"Betfair has always said that they want to compensate horsemen," Bellocq said. "But what their idea of the percentage is, we don't know. My job is to be nervous, whether its Betfair or any other group. A lot of folks are well-meaning, but at the end of the day, if you are a trainer or owner you have to get a fair share."

Chris Scherf, the executive vice-president of the racetrack trade group Thoroughbred Racing Associations, said that although he believed Betfair got a bargain for TVG, the TVG business model has been showing strain ever since the entry of Churchill Downs into the account-wagering market. His question was whether Betfair could come up with a better business model, and if so, how it would impact a racing industry already operating on thin margins.

"TVG's original business model was for a monopoly," Scherf said. "That model doesn't work anymore because it's far more competitive than that. And that's now become Betfair's problem."