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GVC/Ladbrokes deal a boon for shareholders

The proposed deal includes a loan covenant that depends on the outcome of the government's review of fixed-odds betting terminals
December 11, 2017

Gamblers aren’t known for being a patient bunch. GVC Holdings (GVC) is holding true to the stereotype with its most recent bid for fellow bookie Ladbrokes Coral (LCL). Both companies have confirmed that talks for an all-share deal are under way, the third time GVC has made an approach for Ladbrokes within about a year. That's despite the fact that the fate of fixed-odds betting terminals is not likely to be known until sometime in the spring next year.

IC TIP: Buy

This time around, the deal values Ladbrokes Coral at around £3.9bn – but there’s a catch. Ladbrokes shareholders will receive at least 32.7p in cash and 0.141 ordinary shares in GVC, and potentially up to a further 42.8p as part of a contingent value right (CVR). This payoff hangs on the outcome of the government’s review into the maximum stakes allowed on fixed-odds betting terminals. Should the maximum stake allowed to be gambled on the machines be reduced to £2 a spin - the lowest proposed level - then the loan notes would have no value. If the stake is cut to £20 then the CVR is worth 30.3p, or 40.4p for a £30 stake. Should the outcome of the review be the most optimistic of the bunch, £50 a stake, then CVRs will be valued at 42.8p.

Such creative financing is an interesting way to help insulate GVC from the potential downside risk of the planned changes, since more than half of Ladbrokes’ high-street revenue comes from such machines. It’s been estimated that Ladbrokes could see around £450m wiped off its annual revenue and £100m per year slashed in pre-tax profits, which would send EPS down by around 40 per cent, in the case that the £2 extreme is selected.

Investors could be left wondering why not just wait until the outcome of the review. This might be because GVC’s shares are trading around an all-time high, and so management is eager to take advantage of the group’s buying power. It’s been reported that the last round of talks broke down over concerns about GVC’s Turkish business, which has since been sold off. GVC is hoping that the combined group would be an “online-led globally positioned betting and gaming business”, enabling the group to take advantage of the various brands and ways to play. It would also increase GVC's current share of revenues from locally regulated markets to more than 90 per cent. When GVC sold its Turkish business, management said part of the rationale behind the sale was to focus more on regulated markets.