[toc]A pair of giants in the sports betting may be joining forces, as GVC CEO Kenny Alexander announced his company was in detailed discussions about a merger with the Ladbrokes Coral Group.
- The deal announcement can be seen here.
- The investor presentation is available here.
- The investor call can be re-played here.
The deal has the support of both boards of directors, so will likely go ahead, creating a combined group with annual net gaming revenues of over £3 billion ($4 billion).
GVC’s key brands include SportingBet, Bwin and partypoker, while Ladbrokes Coral has a huge position in the UK retail betting markets under its name brands. The combined group will get 56.2 percent of revenues from digital with 42.9 percent from retail.
Alexander has been agreed as the CEO of the new group.
Ladbrokes and GVC a merger of the and the new
Until now GVC has been a purely online business, whereas Ladbrokes, which merged with Gala Coral just over a year ago, is one of the UK’s oldest high street bookmakers. It dates back to 1886, opening its first London offices under the Ladbrokes brand in 1902.
Despite the completely different historical development of the two companies, Alexander told investors on a conference call that the cultural fit between the senior management of the companies was a major attraction in choosing Ladbrokes as its merger target.
The logic of the GVC-Ladbrokes deal
The deal announcement presented a case for the merger that was short on specifics and long on general statements of mutual competence.
“The enlarged group would be geographically diversified with a large portfolio of businesses across both regulated and developing markets, with the scale and resources to address the dynamics of a rapidly changing global industry. Any transaction would also enhance the enlarged group’s position in a number of the world’s largest regulated online gaming markets, including the UK, Italy and Australia, and would significantly increase GVC’s current share of revenues from locally regulated/taxed markets to more than 90 per cent.”
The key points set out in the presentation to investors were:
- 90 percent of net gaming revenue coming from locally regulated/ taxed markets
- Portfolio of strong and complementary brands, powerful CRM systems, and the ability to apply best practice to enhance customer experience in a responsible gaming environment
- Expect to generate material synergies from the combination
- Top three market positions in three of Europe’s largest online gaming markets – UK, Germany and Italy
- Significant business in Australia and exposure to the USA and other growth markets
- Established brands in all key product verticals, sports, casino, poker and bingo
- Size and resources to address the dynamics of the rapidly changing global gaming industry
- Expertise and scale across all distribution channels (online, retail and mobile)
- A proven, highly flexible and highly scalable technology platform across all verticals
- Well positioned to be a global leader and one of the principal consolidators in the gaming sector
- Ownership of the critical technology platforms
- Flexible deal structure allows for range of triennial scenarios
- Favourable financing conditions anticipated
During the investor call, Alexander stressed GVC’s experience in making acquisitions work, saying that after the purchase of both SportingBet and Party Gaming, group revenues more than doubled.
The combined group’s net debt would increase to 3x (up to 3.5x) EBITDA, but the cost of finance was down from a 3.25 percent margin to 2.75 percent as the result of existing debt refinancing measures. The cheap money available for corporate acquisitions is expected to continue, or in business-speak, “Favourable financing conditions anticipated.”
Combined group market presence
As far as online business is concerned, the deal would create a dominant position for the new group in the UK as well as sizable presences in the other geographical markets. The group would have exposure to markets that could account for €19 billion of interactive global gross gaming revenue, which is more than 50 percent of the total for the entire world.
Those revenues split across discrete markets are estimated at:
The Gala Coral/Ladbrokes merger prompted a government inquiry by the UK’s Competition and Markets Authority, which resulted in the sale of 400 high street betting shops to avoid the creation of a monopoly. GVC’s digital basis means that this deal is unlikely to be similarly scrutinized.
When questioned about adding a retail division to GVC’s internet business, Alexander made it clear that this was a decision the company had made some time ago as a necessary requirement of any potential merger.
In his comments to investors, he said that he expected the bulk of future growth to come mainly from the digital businesses, and that he would leverage the retail presence to help grow internet revenues.
The deal will make GVC/Ladbrokes Coral the largest company in online gambling
Compared to other online gambling companies, the new group will be head and shoulders above them in terms of net gaming revenues.
The group would be almost double the size of Paddy Power Betfair, and even a merger between Amaya and William Hill — still the subject only of market rumor — would not displace the group from the No. 1 slot.
How will the deal be split between Ladbrokes Coral and GVC
GVC is offering an unusual deal. The uncertainty caused by the UK’s “Triennial Review” which is expected to place serious restrictions on Fixed Odds Betting Terminals (FOBT) means that the price GVC is offering will not be known for definite until the results of the review are published in January.
The deal announcement explains:
“Ladbrokes Coral shareholders would be entitled to 32.7p in cash and 0.141 ordinary GVC shares for each Ladbrokes Coral share, and a potential further value of up to 42.8p structured as a contingent value right (“CVR”). The value of the CVR, which would be satisfied by the issue of loan notes by GVC (the “Loan Notes”), would be determined by reference to the outcome of the Department of Digital, Culture, Media and Sport’s current ‘Review of Gaming Machines and Social Responsibility Measures’ (the “Triennial Review”) relating to the regulation of Category B2 Fixed-Odds Betting Terminals (“FOBTs”) and its estimated impact on the run-rate profitability of Ladbrokes Coral’s UK business, after giving effect to any mitigations.”
In short, GVC is valuing Ladbrokes Coral at around £3.1 billion, which amounts to 160.9p a share with a possible additional CVR payment of up to 42.9p per share based on the outcome of the government review. The maximum GVC would be paying, in a mix of cash and equity, is £3.9 billion.
Plenty of the questions investors posed to Alexander during the conference call looked like attempts to value what is in effect a derivative based on government policy. The guidance Alexander offered can be summarized as “we don’t know what it’s worth, but if it’s worth nothing, we won’t be reducing the base payment.”
Usually this level of uncertainty could be a deal breaker, as it demands a considerable amount of confidence from investors in some major uncertainties. However, the UK Triennial Review has been discussed ad nauseam by investors, and there may be a flavor of unconcern, since a negative review will affect Ladbrokes Coral’s value badly, and the CVR payment solution at least takes that into account.
Online sports betting impact
Alexander promised investors that as the CEO of the new group he would “aggressively” pursue market share.
This was only to be expected, but the detail of how he does that may be visible to ordinary sports bettors.
Alexander made great play of the proprietary systems that GVC has and how these would be exploited to improve revenues. While digesting the acquisition of Bwin, Alexander noted in particular how some of the algorithms being used by the sports betting platform were inaccurate and how GVC’s managers had brought much needed expertise to improve the profitability of the vertical.
A similar review of the Ladbrokes Coral systems may not necessarily produce the same results. But it’s a fair bet to say that GVC will have an eagle eye open for efficiencies.
Ladbrokes is also dependent on contracts with Playtech for many of its online services. Alexander said that Playtech should see the merger as an opportunity, but from his tone it was clear that this is an opportunity only if Playtech can outperform GVC’s own platform solutions.
Sports bettors can therefore expect change in the product they are offered, albeit the change may be for the better.
Investors will now be looking at what value the deal will bring to them, to determine how they will vote when the time comes for each board to present the decision to the shareholders. The immediate reaction in the markets was a nearly 30 percent increase in Ladbrokes Coral’s share price, implying strong support on that side of the deal.
GVC’s share price gained only 4.5 percent, suggesting that Alexander may still have to use his salesmanship skills to bring his own shareholders fully on board.