Betting company Ladbrokes (LAD) will be hoping the major investment programme announced as part of its planned merger with rival Gala Coral can stem its profit falls of recent years.
If the proposed merger goes through, the combined Ladbrokes Coral would have a market capitalisation of around £2.3bn, virtually double the current value of Ladbrokes - while net revenue is expected to jump from £1.2bn to £2.1bn. Management cites online growth potential as a key factor in the merger, as well as a broader international business and cost synergies of at least £65m a year. This will be driven in part by Ladbrokes closing 60 shops this year.
The Harrow-based business has seen pre-tax profits fall from £200m in 2012 to £38m last year, despite modest increases to revenues. The board has reduced its 2015 operating profit forecast by £20m because of its latest strategy overhaul, which is aimed at improving its online and UK retail businesses as well as further supporting its Australian revenues.
Part of the appeal of the shares for investors has been their generous dividend yield, which was 7.5 per cent last year. But the full-year dividend for this financial year is to be slashed by two-thirds to 3p. The lower dividend and cost-cutting are expected to generate £150m-£155m for reinvestment, which includes an increase of £85m in digital operating expenditure and marketing through to 2017, and a £45m-£55m increase in capital expenditure across UK retail and digital. Only 11 per cent of Ladbrokes' regular customers use its website to place bets, but management hopes the merger will substantially increase its online presence.
The deal is being supported by technology platform provider Playtech, which is taking a roughly 22 per cent stake in the 93m share placing launched to help finance the merger. Analysts at Peel Hunt have previously suggested Ladbrokes should use Gala Coral as a template for how to turn around its struggling retail and online estate, and upgraded the shares on the news.
