Française des Jeux : Dear bet

FDJ is a great firm. The French state is charging too high a price for the privilege of accessing a monopoly. The placing syndicate would do well to cut the issue price to €13. See our potential conflicts of interest at the bottom of the story.

Great monopoly, reasonable growth plans and dividend expectations, proper governance if a tad old civil servant dominated, shame about the price… That sums it up. With a target range indicating a mid-way IPO price at €18.2, the seller’s price is way too high for the investment community. Based on AlphaValue’s bog standard valuation processes and in continuity with a sector coverage of four stocks over the last 10 years (after GVC acquired Ladbroke Coral), the target price for FDJ stands 15% below the mid-range, or €14.7. As this is a target price, one would expect the selling price to be at least 10% lower, or say €13.

Good regulatory balance

AlphaValue has no qualms about the asset quality and the long-term project of FDJ. It is also of the view that the French government has done a rather good job of selling a controlling stake in a “vice” business, while retaining mechanisms that protect public health without subtracting too much of the value for the new owners of the 52% to be sold in the market. One may be unhappy about the fine print that goes with any business that requires regulation but it is clearly stated and unlikely to be a brake to FDJ’s ability to pay a rising dividend. So, there is no issue with the assets.

Expensive limited growth

The issue is with the valuation. FDJ is a monopoly (lottery) – i.e. limited growth – which has to redeploy, i.e. execution risks. In essence nobody will buy it for a growth that does not exist. It is likely to grow less than European peers already more focused on online sports betting. No growth impacts both cash flow based valuations and peer based valuations.

The unknown is what markets will want to pay for a monopoly when measured in Net Asset Value terms. The suspicion is that the seller thinks it can corral in two sets of buyers who may take a very positive view of the business.

This includes:
1) betting clients attracted to a strong brand name and willing to become shareholders
2) the c.28,500 tobacconists which are the extended arm of FDJ for the distribution of its products and thus have a vested interest in retaining a very profitable relationship with FDJ.

The paradox is here: FDJ is too expensive by any standard but the seller has leverage on would-be non-financial buyers. The more traditional variety of investors should require a lower IPO price. We would stay put.

Read the full initiation coverage study:

The full research paper is also available on BLOOMBERG, FACTSET, REFINITIV, CAPITALIQ and ALPHASENSE

Potential Conflicts of Interest checklist: