Bid rumours revive at Ladbrokes

Ladbrokes' (LAD) hit the news last week after a mysterious trade for over 43.6m of it shares - at 170p a share - created a new significant shareholder. Unfortunately, that stake is just below the 3 per cent limit that would force the identity of the acquirer to be revealed. However, it's widely reported to have been gaming software company Playtech (PTECH) - which already has a joint-venture with Ladbrokes. The news tallies with an announcement from Schroders (SDR) that it had cut its stake from 12 per cent to below 10 per cent.

The move follows a profit warning from Ladbrokes last month - its second this year - triggered by ongoing problems at its digital gaming arm. Operating profit at the unit is now likely to be "below current market expectation" and within a range of £10m-£14m. Playtech (PTEC) was brought in to beef-up the online offering, but managing that collaboration is proving difficult. As Investors Chronicle's Bearbull has already pointed out (Betting Your Job, 3 October 2013), the arrangement has left Ladbrokes trying to run a duplicate sets of online systems during the transition period.

This uncertainty has led some brokers to speculate about the company long-term future. Some have said that the loss of market share in the digital division might now be too great to overcome - in which case taking the company private has been mooted. There are certainly examples of formerly listed, now privately-owned, bookmakers that could offer a model - Gala Coral has been notably successful away from the market, for instance.

Numis Securities says...

Hold. There's press comment that the stake has been bought by either Playtech or interests associated with Playtech founder, Teddy Saggi and that this could be the precursor to a bid. Moreover, Joe Lewis, Dermot Desmond, John Magnier and JP McManus have all been rumoured to have significant stakes in Ladbrokes - a bid from some combination of these has also been a persistent rumour. A bid could also result in the separation of the shops from the online business as the cash-generative shops would suit a private equity leverage structure. But, given what we actually know - trading has been poor and Ladbrokes is struggling with considerable strategic challenges in a competitive market - we reiterate our hold stance and our 185p price target. Expect pre-tax profit of £116.4m for 2013, giving EPS of 11.3p and a 9p dividend.

Peel Hunt says...

Hold. It's looking fairly certain that Playtech has taken the stake, although so far that's being briefed as an investment opportunity rather than the prelude to a takeover. Interestingly, broker Shore Capital handled that trade - it also handled the disposal of Playtech's stake in Sportech (SPO) a few weeks ago, boosting speculation that Playtech was behind the Ladbrokes move. Against that background, there's little reason to exit now. Moreover, the market is presently keen on recovery stories and Ladbrokes' recovery could begin next year - we expect underlying pre-tax profit to reach £150m for end-2014, giving EPS of 14.5p. Accordingly, we maintain our hold recommendation and a target price of 175p.