In a world where uncertainty around regulation has made investing in bookies a gamble in itself, GVC (GVC) looks as though it may be about to become one of the safer bets in the sector. We think it is worth taking a punt on the shares as the group finalises the takeover of fellow gambling company Ladbrokes Coral. True, this is not yet a done deal and needs shareholder approval. But, while two other approaches by GVC to Ladbrokes have failed, we believe there are good reasons to think that the new recommended offer will get the thumbs up from shareholders and complete this spring. As long as it does, there could be good upside for GVC shares as the enlarged group benefits from scale and increased exposure to regulated markets.
Takeover of Ladbrokes Coral
Value of deal based on government enquiry outcome
Deal would expand its geography and modes of play
Increased exposure to regulated market
Ladbrokes deal still needs shareholder approval
Now exposed to government enquiry
Ladbrokes and GVC announced their agreed deal at the end of last year. In some regards the timing seemed odd, as Ladbrokes' estate of betting shops could face a major hit from a government review into fixed-odds betting terminals, labelled by some "the crack cocaine of gambling" for their addictive and pocket-emptying nature. But GVC's bid for Ladbrokes has been cleverly structured with loan notes that become more or less valuable depending on how stringent the new regulations are. The government has already said that fixed-odds maximum stakes will be reduced from £100 to between £2 and £50, with potentially serious implications for high-street bookies' profits. The loan notes mean the total value of GVC's bid reflects this by dropping from £3.9bn should the review favour a £50 cap, to £3.1bn if the maximum is reduced to £2 a spin. For Ladbrokes, the logic of the deal is likely to prove more compelling the tougher the regulation, while the structure of the deal insulates GVC and its shareholders from the worst-case scenario. This is something we can see shareholders voting for.
The chances of the deal being approved have also been strengthened by GVC's disposal of its Turkish business last year. Legal issues associated with gambling in Turkey had previously been an impediment to Ladbrokes.
Should the deal go ahead, GVC will look a far more respectable operation. The aim is to create an “online-led globally-positioned betting and gaming business” to take advantage of the various brands and ways to play across the combined group. Significantly, the takeover would increase GVC's exposure to regulated markets to 90 per cent of revenue. This is likely to entice shareholders that may have previously been put off by GVC's exposure to unregulated territories. Another factor that could well attract new investors, and especially index funds, is that the deal is very likely to push GVC into the FTSE 100.
Outside of the possible tie-up with Ladbrokes Coral, GVC appears to be in good shape on its own. The company reported record net gaming revenue (NGR) of €280m during the fourth quarter. This brings NGR for the year to December 2017 to around €1.01bn, an 18 per cent increase on 2016 on an underlying basis. This was particularly pronounced in the sports brands division, where daily NGR grew by a quarter. The gross win margin (stakes minus payouts) came in at 13.1 per cent, which management called significantly ahead of the expected long-term average of 10 per cent. The amount customers were willing to wager fell by 11 per cent over the quarter, but this was primarily due to the Turkish business.
GVC HOLDINGS (GVC) | ||||
ORD PRICE: | 940p | MARKET VALUE: | £2.9bn | |
TOUCH: | 939-940p | 12-MONTH HIGH: | 966p | LOW: 576p |
FW DIVIDEND YIELD: | 3.0% | FW PE RATIO: | 17 | |
NET ASSET VALUE: | 445¢* | NET DEBT: | 11% |
Year to 31 Dec | Revenue (€m) | Pre-tax profit (€m) | Earnings per share (¢(¢) | Dividend per share (¢) |
2014 | 225 | 42.9 | 63.8 | 55.5 |
2015 | 247 | 50.0 | 75.0 | 56.0 |
2016 | 843 | 88.7 | 31.8 | 30.0 |
2017* | 956 | 195 | 63.6 | 31.0 |
2018* | 930 | 201 | 63.0 | 32.0 |
% change | -3 | +3 | -1 | +3 |
Normal market size: | 3,000 | |||
Matched bargin trading | ||||
Beta: | 0.63 | |||
*Includes intangible assets of €1.56bn, or 517¢ a share | ||||
**Investec forecasts, adjusted PTP and EPS figures; £=€1.13 |