LONDON (Alliance News) - Ladbrokes PLC and Gala Coral Group Ltd on Friday said they have agreed to merge to create a gambling company with a market capitalisation of around GBP2.1 billion, the biggest tie-up to have emerged thus far from a flurry of merger and acquisition activity in the British gambling sector.
In addition to the Gala Coral deal, Ladbrokes outlined the findings from its strategy review, tabling a three-year investment programme under which it will aim to growth its UK digital business aggressively, increase its UK football business, and deliver multi-channel growth across the business in moves that will hit its operating profit in 2015.
Ladbrokes also issued a trading update for the first half of 2015, which showed a continuation of the problems it faced in the first half from weak sportsbook margins, punter-friendly results and the implementation of new taxes on the UK's gambling sector.
Ladbrokes shares were down 2.6% late morning Friday to 125.00 pence, one of the worst performers in the FTSE 250.
Under the terms of the deal, Ladbrokes will issue new shares to Gala Coral shareholders representing 48.25% of the enlarged group, with Ladbrokes shareholders to own the other 51.75% of the business. The Gala Coral businesses that Ladbrokes will merge with include Coral Retail, Eurobet Retail and its online business, but not Gala Bingo, the bingo arm that the unlisted operator has been attempting to offload in recent years.
Ladbrokes said it will launch a share placing, issuing 92.4 million shares, 9.99% of its existing total, via an accelerated bookbuild run by UBS and Deutsche Bank in order to strengthen the balance sheet of the new business.
Ladbrokes said the new business, dubbed Ladbrokes Coral PLC, will have net revenue of GBP2.1 billion and GBP392 million of earnings before interest, taxation, depreciation and amortisation, on an illustrative aggregate basis and will be listed in London. It will continue to operate both the Ladbrokes and Coral brands in the UK. It said the combined business till generate 20% of its revenue from online and will become a much more prominent player in the UK online gambling industry.
The pair conceded that they are likely to have to offload some betting shops in order to secure approval from the Competition and Markets Authority, the UK's antitrust regulator, for the deal, but said the remaining store chain still is likely to be the largest in the UK and will be strongly cash generative. Ladbrokes and Coral said they will engage with the CMA early on trying to resolve any competition concerns. The pair will have a combined 4,500 betting shops in the UK after the deal, prior to any required disposals.
"This is a major strategic step for Ladbrokes which firmly accelerates our strategy to improve the customers' experience and build recreational scale. Ladbrokes and Coral are two highly complementary businesses, with rich heritage and brand presence across the UK and internationally," said Ladbrokes Chairman Peter Erskine.
"Together, we will create a leading betting and gaming business combining strong brands with an attractive multi-channel offering and an extensive national and international coverage. The transaction will provide an attractive opportunity to generate considerable value for both sets of shareholders, through significant operating synergies and a strong cash flow profile," Erskine added.
The new company will be headed by Ladbrokes Chief Executive Jim Mullen, with Gala Coral Chief Executive Carl Leaver to be executive chairman of the combined business for 12 months post-completion, with a remit to lead the delivery of the synergies the companies envisage can be achieved through the merger, which they have estimated at GBP65 million a year most which delivered in the second year post-merger.
John Kelly, currently senior independent non-executive director at Ladbrokes, will become non-executive chairman of the combined business, while Gala Coral Chief Financial Officer Paul Bowtell will be the cfinance chief of Ladbrokes Coral.
As flagged in a report by Sky News prior to the announcement on Friday morning, Andy Hornby, the former chief executive of HBOS, will also become part of the management team. Hornby, currently Gala Coral's chief operating officer, will become the chief operating officer for the UK retail and digital businesses. Hornby was the chief executive of HBOS when the bank was forced into a rescue deal with Lloyds Banking Group at the height of the financial crisis in 2008.
Under the terms of the merger, Gala Coral will bring GBP865 million in net debt to the merged company. Gala Coral's debt pile had been a key concern prior to the deal being agreed, given the amount of debt put onto its books by its private equity owners in recent years. Gala is being sold by hedge funds Apollo Global Management, Cerberus Capital Management, Anchorage Capital Partners and Park Square Capital.
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.
The merger comes at a time which analysts broadly believe to be positive for UK bookmakers from a political perspective, after the Conservatives won a majority in the General Election in May. UBS, in a note published back 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 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.
Last week, those predictions of a more accommodating political environment for the gambling industry were borne out after the UK government rejected a bid by 93 councils in England and Wales to have the maximum bet on fixed-odds betting terminals significant reduced. The councils were calling for the highest stake allowed on the betting machines to be cut from GBP100 to GBP2, but the government said it has already introduced stronger controls on this part of the market.
The talks to form Ladbrokes Coral also emerged amid further consolidation activity in the UK gambling industry, the first major development in which materialised last week when 888 Holdings PLC sealed a GBP898.3 million deal to acquire Bwin.Party Digital Entertainment PLC, following a bidding battle between 888 and AIM-listed GVC Holdings PLC, which had entered its own, higher bid but which Bwin.Party rejected citing potential execution risks.
Merger opportunities have increased in attractiveness to the UK gambling sector as high-street operators take a hit from new gambling taxes in the UK and a margin squeeze from a need to invest in marketing and technology to keep up with the growing online gambling market.
Ian Forrest, investment research analyst at The Share Centre, said scale has become important in the UK gambling sector amid a shift by customers towards online services and due to the recent tax and regulatory changes. With the Coral deal, Ladbrokes has certainly achieved scale, Forrest says, noting the 4,500 stores the combined group will have, notwithstanding any it will be forced to sell, substantially more than the 2,400 William Hill PLC, Ladbrokes' nearest rival, operates.
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.
In a separate announcement Friday, FTSE 250-listed gaming technology company Playtech PLC said it has struck a deal with Ladbrokes on an early determination on the funds it is owed under its marketing services agreement with the bookmaker. Playtech will receive GBP75 million following the Ladbrokes-Coral merger, with GBP40 million of this to be satisfied in Ladbrokes shares and GBP35 million to be paid in cash.
The merger news came as Ladbrokes outlined the outcome of its long-awaited strategy review, which had been delayed after it entered talks with Coral, which will see the company look to increase footfall in its UK retail business and boost its multi-channel sales by expanding its digital operations. As a result of the changes, Ladbrokes said its 2015 operating profit will be around GBP20 million lower than its previous expectations.
Ladbrokes Chief Executive Mullen, the former digital chief at Ladbrokes who joined the company from William Hill, was charged with leading a review of the business following the hefty pretax profit drop it suffered in 2014, as shop closures and impairment charges more than offset revenue growth. At the time, while still under the leadership of Mullen's predecessor, Richard Glynn, the company said it was intending to expand its international operations, close more betting shops, improve its online operation and bolster its competitive position.
The three-year strategy outlined on Friday calls for the company to "aggressively" grow its UK digital recreational sportsbetting customer base, a push to be driven by "more intense brand and direct marketing" as it works to build digital scale and accelerate growth in the division.
Ladbrokes also intends to increase footfall in its UK retail business, through increased sponsorship, marketing, investments in self-service betting terminals, and selective improvements in other parts of the business in order to improve its over-the-counter betting revenue.
The group said it is targeting its net revenue per shop being higher than in 2014 by 2017, with its earnings before interest and tax also to be above 2014 levels by the same year.
Ladbrokes will target increasing its digital division's contribution to group revenue to 30% by 2017, up from 18.6% in 2014, and wants to increase active users on Ladbrokes.com to more than 1.3 million from 960,000 in 2014. Ladbrokes also said it wants to double net revenue from its Australian business over the period.
Due to the investment required to back the changes, operating profit for 2015 will be around GBP20 million lower than the company's previous expectations, though it said it will pay a full-year dividend of 3 pence per share, split between a 1 pence interim payout and a 2 pence final payout.
"Today I am announcing an aggressive three-year investment programme to build our UK Retail, Digital and Australian recreational customer base. I also intend to restore our passion and pride of being at the heart of sportsbetting in our culture and all that we do," said Mullen. "Current trading shows how results have continued to favour our customers but the underlying customer metrics, on which we have built our strategy, provide strong support for this plan."
In addition to the merger announcement and strategy review outcome, Ladbrokes also published a trading update for the first half of 2015, which showed its UK retail revenue rose by 1.2% in the first half to GBP410.5 million, while digital revenue rose 6.9% to GBP112.2 million and European retail revenue fell 2.1% to GBP60 million.
For the half-year, group net revenue rose by 1.3% to GBP585.4 million, as results continued to be punter-friendly and margins remained lower year-on-year, particularly in its sportsbook. Headline operating profit for the half dropped by 32% to GBP38.9 million, hit by newly-introduced taxes in the UK and weakness in the sportsbook margins, which offset the better UK retail and digital performances.
Back 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.
Still, excluding the operating profit hit the investment programme will have for the full-year, and on the assumption that sporting results and margins will return to historic averages in the second half, Ladbrokes still anticipates meeting its expectations for the full year.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance
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