It is not hyperbole to suggest that the gaming in the UK faces its greatest period of uncertainty in living memory as traditional bookmaking companies like Ladbrokes (LAD) deal with the pressure of online gaming companies rapidly expanding in regulated markets. That comes on top of a raft of tax and regulatory changes in 2014 that could prompt a major period of consolidation in the sector around its strongest players.
- Consolidation needs to happen
- Still very cash generative
- Dividend held steady
- Regulatory and tax changes
- No global reach
No one could accuse Ladbrokes of being in a particularly strong position at the moment - the company recently had to issue a statement denying that it was about to release its fourth profit warning in the past 12 months, which also prompted chairman Peter Erskine to buy £50,000 of shares. But the bookie has an valuable brand and bricks-and-mortar market presence, which makes it an attractive bid target. In the meantime, strong cash flow should help the fat dividend, equivalent to a yield of over 5 per cent, to be maintained and underpin the share price.
Ladbroke’s problems stem from an increasing realisation that using purely its own resources it is unlikely to bridge the gap between itself and the market leaders in online gaming, William Hill (WMH) and Paddy Power (PAP). Ladbrokes has stayed close to its roots and most of its 2,800 shops are based in the UK, with a few in Spain and Belgium. By contrast, as well as a strong online position, Paddy Power’s operations straddle Ireland, the UK and Australia - one of the single most lucrative betting markets in the world. William Hill too has branched out with the $49m (£31m) purchase in 2012 of a betting concession in Nevada, which gives it a clear strategic intention given recent progress towards liberalising US online gambling.
That leaves Ladbrokes in a quandary about whether to risk its relatively lowly-geared balance sheet on an overseas buying spree. Currently, it looks as if this would probably not be worth the effort as most of the real opportunities have already been locked away by the competition. This leaves a possible merger or sale at some point in 2014 as a realistic alternative for investors.
Warwick Bartlett, an analyst with Global Betting and Gaming Consultants (GBGC) is blunt: "Investors should [push for the disposal of] the business, there is just no value in fighting on." He pointed out that Ladbrokes did try and merge with Coral betting in 1998, but the deal was vetoed by the Monopolies and Mergers Commission on competition grounds. By contrast, Mr Bartlett thinks that a merger with Paddy Power would have a greater chance of success as the Irish bookmaker has a negligible presence on the ground in the UK, but possesses the online dominance and expertise that Ladbrokes so obviously lacks.
LADBROKES | ||||
|---|---|---|---|---|
| ORD PRICE: | 175p | MARKET VALUE: | £1.6bn | |
| TOUCH: | 175-176p | 12-MONTH HIGH: | 245p | LOW:165p |
| DIVIDEND YIELD: | 5.2% | PE RATIO: | 14 | |
| NET ASSET VALUE: | 49p* | NET DEBT: | 84% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 0.98 | 173 | 15.2 | 7.6 |
| 2011 | 0.98 | 155 | 14.9 | 7.8 |
| 2012 | 1.08 | 206 | 21.2 | 8.9 |
| 2013** | 1.11 | 117 | 11.3 | 8.9 |
| 2014** | 1.17 | 133 | 12.8 | 8.9 |
| % change | +3 | -6 | -6 | - |
Normal market size:10,000 Matched bargain trading Beta:1.21 *Includes intangible assets of £742m, or 81p per share **Investec Securities estimates, underlying PTP and EPS figures | ||||
In spite of its problems, the company does have a number of attractions for potential acquirers. Ladbrokes has enviable brand recognition and a reputation as a true blue bookmaker to royalty and high rollers. However, it is not only intangible social cachet that is interesting, cold hard cash speaks even louder. Last year its operations generated free cash flow of £141m. While free cash flow is forecast to fall with earnings (see table), strong cash generation should remain an attraction for some time yet.
It is also possible to argue, counterfactually, that in failing to launch a realistic online business, Ladbrokes has spared its shareholders from the sector's current worst excesses. Marketing budgets ahead of the introduction of a point-of-consumption tax look utterly unsustainable as businesses try to build up market share - Betfair (BET) recently revealed that its marketing spending was going to top £100m in this financial year. Trying to match this is a recipe for disaster given Ladbrokes' starting point, so in a sense shareholders can now be grateful for the short-sightedness of previous management.
