Investing in gambling groups has become a bit of a bet in itself. But one thing is certain: the biggest challenge facing the sector this year is the outcome of the government’s review into fixed-odds betting terminals (FOBTs). The maximum stake per turn on the machines will be cut from its current level of £100 to either £50, £30, £20 or £2. How gamblers are monitored is also under review, as is how fast machines spin and how long it takes for players to place another bet. A drastic cut to stakes would be bad news for the companies running high-street gambling shops, and could make further consolidation in the industry more likely.
Ladbrokes Coral (LCL) is the most exposed when it comes to the upcoming changes to fixed-odds betting terminals. More than half of the company’s high-street revenue comes from these machines. It means that Ladbrokes could suffer an estimated £450m cut in annual revenue and £100m off pre-tax profits should the government opt for the extreme £2 per stake option, and EPS could fall by around 40 per cent. The company has been focusing more on its online operation to offset the worst of the changes on the high street, but management is hopeful that the government is basing the review on evidence rather than emotion.
The uncertainty surrounding the review hasn’t stopped wider M&A activity. In December, GVC Holdings (GVC) made a fresh attempt to take over Ladbrokes Coral, this time valuing the company at £3.9bn. While it may seem overly eager for GVC to make another offer before the outcome of the review is revealed (likely in the spring), the details were mindful of the added risk. A contingent value right (CVR) is on the table, which means the amount GVC will pay for Ladbrokes depends on the government’s final FOBTs decision. At £2 a stake, the loan notes would have no value. But at £20 the CVR would be worth 30.3p per share, or 40.4p for a £30 stake, and finally 42.8p for a £50 stake. In any scenario, Ladbrokes shareholders would receive at least 32.7p in cash and 0.141 shares in the enlarged group. The offer isn’t a done deal yet, but it could kick off a consolidation wave this year.