The move will pretty much double the group's size, raising its market capitalisation to £2.3bn on the current share price of 113p. In the process - and including the effect of a separate share placing that's in motion - Ladbrokes' current shareholders will be diluted by just over 50 per cent. They will happily vote for that if they are confident that Ladbrokes Coral combined will be an improvement on what they currently wholly own (and, let's face it, they'll almost certainly vote for it anyway).
Yet experience says that Ladbrokes and Coral are coming together in large part because they don't know where else to go; not that the protagonists are going to admit to that. For starters, Gala Coral has been in the hands of private equity for many years and now has so many shareholders that it is halfway to being a listed company anyway. Those shareholders had agreed to sell its casino operations two years ago, so it seems a natural progression that they should now be selling the betting operation, too.
Meanwhile, Ladbrokes has been in all sorts of difficulties coming to terms with almost anything to do with the internet and smartphones. This technology provides natural media over which bookmakers can ply their trade, although it's deeply disruptive for players with expensive bricks-and-mortar estates, such as Ladbrokes. In a sentence, that explains why Ladbrokes' share price is 75 per cent below its high point of eight years ago and why there was so little fuss over the departure of the previous two chief executives.
Still, put two similar businesses together and it's axiomatic that the first thing bosses will talk about is 'synergies', usually a euphemism for costs that can be cut. Ladbrokes puts the synergistic figure at £65m a year, all of which should be coming through by 2018. That's a useful amount, although hardly a compelling one. Depending on how you look at it, that amount of synergy might be worth a lump-sum 26p a share to Ladbrokes' shareholders now; not that there has been any sign of that in the share price movements since the merger was announced. Alternatively, it could add about 2p per share to annual earnings, though - due to inflation - that amount would diminish in importance as time rolled by.
Either way, these are not amounts that would transform the Ladbrokes share price. Transformation - or something approaching that - would arise if the combined group could regularly generate Gala Coral's underlying profit margins. In 2013-14 these were 15.5 per cent, three percentage points higher than Ladbrokes' underlying margin. Factor those into the £2bn-plus annual revenue of the combined group and that would feed through to earnings of 13p or so - enough to generate 170p of share value for all but the most demanding investor.
Yet there can be no especial confidence that earnings on that scale will be produced regularly. After all, in the past five years Gala Coral (admittedly including non-betting operations) has chalked up £875m of exceptional charges of one sort or another against aggregate operating profit of £802m. Simultaneously, the corresponding charges for Ladbrokes are, perhaps surprisingly, much more modest - £115m in aggregate while it made £883m operating profit. Taken altogether, figures such as those hardly inspire confidence that there is a great business itching to emerge from the combined entity, although the data for cash generation does look a whole lot better. In the past five years Gala Coral has generated £871m of free cash and Ladbrokes has produced £851m.
Meanwhile, management has taken the opportunity to do the conventional thing in times of uncertain transition - it plans to cut the dividend (from 8.9p in 2014 to 3p). Given the level of free cash generation just mentioned, that might be a bit harsh even though cash flow has been on a downward trend in both companies.
The sceptic's interpretation is that management is cutting the dividend now in order to be able to raise it briskly in the coming years. And there is much to be sceptical about in this deal, not least the point that it will very nicely suit Ladbrokes Coral's new bosses that the size of the group is to double so quickly. Nothing correlates with the size of the boss's pay better than the size of the company he runs. So Mr Mullen already looks set to do very well out of his tenure. Let's hope Ladbrokes shareholders do half as well.
Bearbull, however, will not be coming along for the ride. The Bearbull Income Portfolio held Ladbrokes' shares for three years and persisted with them even when they fell through a stop-loss level at 182p. The shares still look like an interesting selection for a speculative fund, but slashing the dividend means they yield just 2.7 per cent and so have no place in an income fund. There is no point in pretending otherwise. I take the losses and move on.
