23rd Jun 2015 12:38
LONDON (Alliance News) - Ladbrokes PLC late on Monday confirmed that it is holding talks with unlisted rival Gala Coral Group Ltd on a possible merger, sending its shares soaring higher throughout trading on Tuesday.
The talks involve a proposed merger of Ladbrokes and Coral Retail, Eurobet Retail, and Gala Coral's Online businesses. Gala Coral Group also includes the Gala Bingo brand.
The talks are focusing on plans to create an enlarged business which would be traded on the main market of the London Stock Exchange, Ladbrokes said. The betting firm currently is traded on the London main market and is a constituent of the FTSE 250 index.
Ladbrokes shares were up 17% early afternoon on Tuesday to 142.80 pence, comfortably the best performer in the FTSE 250.
Ladbrokes said there is no certainty a deal will be done between the two or on the timing of any agreement. Ladbrokes also said that, should the deal proceed, it may undertake an equity placing in order to strengthen the balance sheet of the combined business. It also said that the results of its Business Review, due to be published on June 30, may be rescheduled dependent on how talks with Gala Coral progress.
"Since becoming CEO, my focus has been on a more aggressive plan to build digital scale and grow our recreational customer base across all channels, which is key to creating a more sustainable and growing Ladbrokes. My plans are well advanced, and I look forward to presenting them to shareholders," said Jim Mullen, Ladbrokes' chief executive.
"A merger with Gala Coral could create a combined business with significant scale and has the potential to generate substantial cost synergies, creating value for both companies? shareholders. The board has not yet concluded whether a transaction is strategically attractive and can be delivered to shareholders on appropriate terms," Mullen added.
Mullen, the former digital chief of Ladbrokes who joined the company in 2013 from rival William Hill PLC, is leading a review of Ladbrokes following the hefty drop in pretax profit the company suffered in 2014, hit by shop closures and impairment charges, which more than offset revenue growth over the year. The company said at the time, still under the leadership of former CEO Richard Glynn, that it intended to expand its international operations, close more betting shops, improve its online proposition, and bolster its competitive position in 2015.
But in April, reporting first-quarter results, Ladbrokes said profit in the first three months dropped heavily on the back of punter-friendly sporting results and the implementation of tax hikes in the UK. Earnings before income and taxation in the first quarter fell to GBP14.3 million, down 22% year-on-year as a result of customer-friendly results, the implementation of the point-of-consumption tax in the UK, increased Machines Games Duty, and the company's withdrawal from unregulated digital markets in line with guidelines issued by the UK Gambling Commission.
Gala Coral is currently owned by private equity companies including Apollo Global Management, Cerberus Capital Management, Anchorage Capital Partners and Park Square Capital, who acquired the business after it collapsed under its debt pile in 2010.
It is primarily focused on the UK and Italian markets and operates more than 1,800 betting shops in the UK, plus 132 bingo clubs under the Gala Bingo brand, and has 870 Eurobet shops in Italy. Its UK estate makes it the third-largest bookmaker in the UK by outlets, only behind Ladbrokes and William Hill. Ladbrokes operates 2,700 betting shops across the UK, Ireland, Belgium and Spain.
Ladbrokes attempted to acquire Gala Coral back in 1998, but the deal was blocked by the Labour government. Peter Mandelson, then the trade and industry secretary, said a merger of the two would harm consumer choice and competition in the betting sector.
News of the merger talks also comes after reports in March that Gala Coral has hired banks to advise on a possible flotation, with a suggestion it could come to market in October.
Shore Capital said the news of the talks surprised the market, but said the rationale for a merger of the pair is compelling. It kept a Hold rating on Ladbrokes shares.
"We would see significant scope to improve the operational performance of Retail with both groups under-performing William Hill, Coral on revenue and Ladbrokes on both revenue and cost, whilst significant beefing up the online business, providing scale to significant enhance of the combined marketing budget," said Shore analyst Greg Johnson.
"We would imagine any merger would likely lead to the demise of the Coral brand whilst integration of digital should be eased by both business being on the same platform," Johnson added.
Johnson noted, however, that "significant potential hurdles" remain in place for the deal, particularly the regulatory threat given the market presence the combined entity would have, and also raises concerns about what will happen to Gala Coral's GBP950 million debt pile.
Edison Investment Research analyst Eric Opara also raised concerns about concessions the pair would need to make to gain regulatory passage for the deal, particularly the presence the combined entity would have on UK high streets.
Augustin Eden, an analyst with Accendo Markets, is less concerned about the regulatory threat, given the rise of online players in the gambling sector. Though Ladbrokes' previous attempt to acquire Gala Coral was thwarted on competition grounds, the rise of online bookmakers means there remains a "plethora of competing players", Eden said.
He added that a streamlined combination of the two, which would address Ladbrokes' comparative sluggishness in digital compared to rivals and which would allow Gala Coral to offload its bingo arm, "should be seriously considered" by investors.
The merger talks also come at a time which analysts broadly believe to be positive for bookmakers from a political perspective, after the Conservatives won a majority in the General Election in May. UBS, in a note published in May, said the Tory win should prove positive for bookmakers given John Whittingdale, the Culture Secretary, has previously given his backing to betting shops, disputing the notion they are a "blight on the high street".
As the election results flowed in on May 8, shares in bookmakers surged higher amid optimism that a Tory government will present substantially less of a regulatory threat than would have been posed by a Labour government. The Labour manifesto had included plans to give local authorities the power to reduce or ban fixed-odds betting machines from betting shops.
The talks have also emerged amid further consolidation activity in the gambling industry, with a race currently ongoing to acquire FTSE 250-listed online gaming operator Bwin.Party Digital Entertainment PLC. The company is holding talks with smaller UK-listed rival 888 Holdings PLC and with even smaller AIM-listed GVC Holdings PLC, though the latter's bid is being backed by Canadian gaming and gambling company Amaya Gaming Inc.
Back in February, 888 had been the subject of takeover interest itself after it entered talks with William Hill. Those talks broke down the same month after 888 said it had been unable to agree terms on the offer with a key shareholder.
By Sam Unsted; [email protected]; @SamUAtAlliance
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