SBC News Voice of the Sports Betting Industry
As with comedy, timing is everything in business. While there is a logic to the recent outbreak of consolidation within the gambling industry, for two of the mega-deals currently underway – the Paddy Power Betfair and Ladbrokes Coral mergers – the coincidence of the deals is providing onlookers with some choice compare and contrast examples.
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Last week was an important one for both proposed alliances. Paddy Power Betfair published its shareholder circular which over the course of 249 pages dotted the Is and crossed the Ts and also gave the weekend papers some juicy morsels with regard to the remuneration (and potential compensation) packages for the combined entity’s management team, including a potential £4.2m salary and bonus package for chief executive-designate Breon Corcoran.
By way of contrast, the Ladbrokes Coral circular – published earlier in November – doesn’t go into the detail of the remuneration for the proposed executive team of chief executive Jim Mullen, COO Andy Hornby or Paul Bowtell, destined to be the new combo’s chief financial officer.
Given the other news pertaining to both Ladbrokes and Coral within the past fortnight that is probably for the best. In the case of Hornby, his past tenure at the helm of Halifax/HBOS was once again the subject of controversy with the publication of Financial Conduct Authority’s report into the near-collapse of the bank. Gala Coral issued a statement saying he enjoyed the company’s “continuing support”.
More damaging, perhaps, Ladbrokes suffered an airing of corporate dirty linen via a small but still very public shareholder revolt led by Irish billionaire and major shareholder Dermot Desmond. The revolt failed to hinder the progress of the deal, with Desmond managing to rally a mere 3.5% of shareholders to his flag. However, one of the key concerns from his open letter to Ladbrokes shareholders is likely to cause significant delays to any merger timetable.
Desmond complained that the comprehensive review to be undertaken by the UK’s Competition and Markets Authority (CMA) would likely delay the deal and require the companies to dispose of between 400 and 1,000 shops to get the deal through and the loss of up to £70m in earnings.
Desmond suggests this might delay completion until mid-2016, but in truth this is likely on the optimistic side. Despite also being the subject official CMA notification in early November, Paddy Power Betfair remains on track for a first quarter 2016 completion with both companies confident the CMA will give the deal will receive official blessing without the need for a ‘phase two’ six-month enquiry.
In contrast, Ladbrokes and Coral is yet to see any formal CMA notification of the deal. There are significant reasons for the hold up; Ladbrokes Coral raises more questions with regard to competition on the high-street where the pair would control circa 45% of the total market, including of course a similarly high share of currently controversial gaming machines.
It is the issues surrounding the shop estate that in the opinion of most observers is likely to trigger the full two-phase CMA process that at the very least would take us deep into the third or fourth quarter next year and possibly into 2017.
This gives the competition – not least the newly empowered Paddy Power Betfair – nearly a year to put their collective feet on the accelerators knowing that the management and staff at both Ladbrokes and Coral are distracted, first by the deal itself and subsequently by the task of realising the £65m in targeted synergies.
No wonder Dermot Desmond’s attack is stinging. Not only does he feel that the Ladbrokes investors are getting the raw end of the deal in the merger, but any benefit from the deal is in danger of being lost before the pair have even got to the starting line.
This isn’t to ignore the upside. A note following the approval last week from analysts at Morgan Stanley pointed out that it would deliver 40% in earnings enhancements in the first year of completion with EBITDA for the combined group rising in 2018 to £536m from £417m, driven largely by rising online profitability. Such profit enhancements will help when it comes to the debt load of £865m where any pay down will see a transfer of value as the equity is de-risked.
There are reasons to suspect this is more than achievable. The full-year numbers from Gala Coral released on November 30 showed online revenues for the year rose £65.2m to ££247.8m, although EBITDA only rose £6.7m on the year to £56.2m due to the effects of the introduction of Point of Consumption (PoC) tax.
Yet these figures also point to the irony of the Ladbrokes Coral situation: the companies are keen to push ahead with the merger to pursue the opportunities in online even as the CMA is likely to throw roadblocks in front of the deal due land-based issues. According to Morgan Stanley estimates, without the merger the pair are languishing in global revenues terms outside the top ten.
With the tie up the pair would leap to sixth with combined 2014 revenues of £456m. But arguably the most important compare and contrast is that with this combined revenue total, Ladbrokes Coral still trails significantly behind Paddy Power Betfair which achieved combined 2014 revenues of £980m. Even the sunniest optimist might struggle to see that chasm being bridged.
