Combined Ladbrokes Coral has 'superior growth prospects' to William Hill

Combined Ladbrokes Coral has 'superior growth prospects' to William Hill

Wednesday, July 27, 2016 Posted by Andy McCarron
The merger between Ladbrokes and Coral looks set to complete in the autumn

The merger between Ladbrokes and Coral, which is set to happen in the autumn after the Competition and Markets Authority (CMA) gave its blessing, will put the group on an even setting with main competitor William Hill, but it will be better placed to grow in the future.

Analyst Simon French of Cenkos Securities believes there are advantages to the merger but warned that it might not necessarily be plain sailing.

He wrote in a research note: “On a look through basis we estimate the enlarged group is trading on a 2017E EV/EBITDA of 8.8x, in-line with William Hill, but with superior growth prospects and earnings momentum, although the merger and integration process is not without risk and the enlarged group will have increased exposure to machine earnings which we think are at risk from increased taxation.”

Gaming machines are a long contentious issue for betting shops at the moment, although it could be argued that they are more likely to come under political pressure to reduce stakes, and therefore presumably revenues, than to face another rise in taxation. Machine Games Duty for the FOBTs was pushed up to 25% from 20% in March 2015.

The huge merger will only be allowed though once the two companies sell off between 350-400 shops in the 642 local areas that the CMA has identified will be severely hit by lack of competition. French suggests that the companies could raise over £100m from this divestment, assuming a sale multiple of 4x EBITDA, although Ladbrokes and Gala will be motivated vendors.

Inquiry Chair Martin Cave added: “We’ve found that the merger between two of the largest bookmakers in the country would reduce competition and choice for customers in a large number of local areas.

“For these customers, competition comes from the choice of shops in their local area and they would lose out from any reduction of competition and choice. Discounts and offers of free bets to individual customers are two of the ways betting shops respond to local competition which could be threatened by the merger. Such a widespread reduction in competition at the local level could also worsen those elements that are set centrally, such as odds and betting limits.

“Although online betting has grown substantially in recent years, the evidence we’ve seen confirms that a significant proportion of customers still choose to bet in shops - and many will continue to do so after the merger. We therefore believe that a sale of shops of this scale is needed to protect these customers.”

Totally Gaming Says: With Paddy Power merging with Betfair, Ladbrokes with Coral and William Hill potentially with Rank and 888, it could be argued that Betfred will capitalise by being able to focus solely on its betting shop operations compared to its distracted competition. Betfred has long since integrated the Tote business into its operations, and has understandably been linked as a buyer of the 350-400 shops. If it does pick them up, it would take the Betfred estate to c2,200.

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