Weighing up the Lads-Coral merger (part one)
With both parties confident their proposed merger will gain regulatory approval, focus has turned to whether the combination makes strategic sense. But the jury is still out, reports Gerard Starkey
Despite generating a great deal of interest within the industry, news that Ladbrokes and Gala Coral had agreed terms on a merger which promises to create a firm with revenues of some £2.1bn – £400m of which derived via digital channels – has thus far failed to excite many analysts in the City.
Following an initial surge in Ladbrokes’ share price, which saw its value hit 140p, the price at the time of its disappointing H1 results announcement had fallen back to around 110p, roughly the same level it was at before news of the merger talks first transpired.
Leisure analyst Nick Batram of Peel Hunt says Ladbrokes’ proposed merger with Gala Coral has “yet to capture the imagination” while analyst Ivor Jones of Numis Securities describes the share price fall as “probably the most eloquent statement of the consensus view of the various announcements by Ladbrokes, including the merger with Coral”.
Of course the deal still requires sign-off from the Competition and Markets Authority, but as the initial optimism fades we are left to ponder why a combination, which is set to create the biggest retail estate in the UK coupled with an online presence behind only bet365 and William Hill, has yet to convince the critics.
According to analyst Karl Burns of Panmure Gordon, the creation of a 4,000-strong retail estate prior to any potential disposals required to get the merger sanctioned is not something that should necessarily be seen as a positive.
“The City’s concerns regarding the merger are based on a number of factors, primarily that a combination of the two firms will increase its exposure to a structurally declining UK high street bookmaking industry, which currently generates around 66% of profits,” Burns says.
“In addition, the CMA decision could take up to a year with no certainty of the merger being approved, while no-one quite knows how much of the combined retail estate Ladbrokes Coral will have to dispose of. The uncertainty this causes is likely to limit any potential buyers of the stock,” he adds.
There has also been a mixed response to the stated plan of operating three separate brands, Ladbrokes, Coral and Gala. While most observers can see the rationale behind keeping Gala in-play, the decision to keep both the Coral and Ladbrokes brands, not only operational but powered by two separate trading teams, has been met with less enthusiasm.
BATTLE OF THE BRANDS
Ed Andrewes, who led Ladbrokes’ egaming division from 2008 to 2011, believes the two merger partners have failed to learn the lessons from the unsuccessful 2011 union of bwin and Party Gaming. He says the primary reason bwin.party went “disastrously wrong” was because the legacy firms had similar risk profiles, and he sees the same issue with Ladbrokes Coral.
“There are lots of reasons why bwin.party didn’t work out,” Andrewes says. “It never really got to grips with the brand or with the management team, they never made the tough decisions at the start to integrate the businesses, but the biggest reason for that failure was that they had exactly the same risk profiles in regulating territories – France, Italy and Spain.
“So when these territories regulated it became a different business model and one that was very hard to make work, and they had a double whammy on it – not only did it hurt bwin but it hurt Party Gaming too. And that’s what I find surprising about the Ladbrokes Coral merger, that their risk profiles are almost identical,” he adds.
Andrewes says he struggles to see much of an upside for either firm as a result of this deal and a better move for Ladbrokes would have been to merge with a business that had more of a European mainland focus, rather than increase its UK exposure bearing in mind the current pressure on high-street FOBT machines which could yet lead to additional staking restrictions being placed upon them.
“I don’t think either firm is doing this from a position of strength,” Andrewes said. “It feels like a defensive measure and I really can’t see the upside. I don’t think the merger will solve too many issues – it’s going to be tough and I can see both businesses bumping along with the same problems they’ve already got,” he adds.