A force to be reckoned with: the rise and rise of GVC

“I’m obviously very ambitious, but did I really think 10 years after I joined the company that we would get into the FTSE 100? Probably not,” GVC boss Kenny Alexander tells EGR as he reflects on wielding yet another mega-deal.

“I thought we could grow the business quite aggressively and now that we’ve got to where we are, we are still very ambitious. We want to continue to improve the business, deliver shareholder returns and grow the company even more in the future.”

The 48-year-old Scot is unsurprisingly in buoyant mood during our late-afternoon interview. Only a couple of weeks earlier the CEO was finally able to announce terms had been reached with Ladbrokes Coral to acquire the UK bookmaking giant after nearly 14 months of negotiations. GVC has obviously played an instrumental role in industry consolidation in recent years, but with the deal valuing Ladbrokes Coral at up to £3.9bn, this acquisition is clearly on a vastly different scale to previous takeovers and demonstrates just what a colossal operator it has become in recent years.

Alexander’s ability to get yet another landmark deal over the line means the superlatives for him continue to roll in from the City, media and online gambling industry alike. The chief exec has built a reputation for being one of the sector’s canniest operators, with a track-record of turning around struggling businesses and delivering consistent value to shareholders. And although Alexander would much rather play down such praise of his individual achievements, he believes GVC’s most recent bit of business will prove just as fruitful.

Kenny Alexander says the Ladbrokes Coral deal will deliver strong returns for GVC shareholders

“I don’t really bother with what people write about me,” he insists. “I obviously prefer they write complimentary things rather than uncomplimentary things, but I don’t get too carried away. Yes, we have done a few deals, but we haven’t done them for the sake of it. We’re always looking at shareholder returns and that’s all we really care about; if it’s not going to deliver shareholder returns, then we’re not going to do the deals.

“That’s the reason for doing the Sportingbet deal, the bwin.party deal and it’s the reason we’re doing the Ladbrokes Coral deal now. If we don’t think it’s going to deliver the right value for shareholders, then we don’t bother looking at it. If you look at the returns we’ve delivered to shareholders over the last seven or eight years, nobody compares to GVC. We’ve been proven right in the past by doing deals and I’m pretty sure this one will deliver a similar set of returns.”

Time’s a wasting

Of course, there was never really any doubt that GVC had the appetite for another deal after integrating bwin.party into the business in 2016. Alexander had himself previously gone on the record as saying he wanted to complete one more big acquisition as part of his ongoing efforts to build scale against an ever-changing regulatory backdrop. And with talks with Ladbrokes Coral on and off for a number of months, the announcement of the deal on 22 December wasn’t itself a surprise – but the timing certainly was.

Conventional wisdom dictated that any deal was highly improbable until the UK government had made its final decision on fixed odds betting terminal (FOBT) stakes. After all, this, along with a disagreement on how to value grey market revenues, had been one of the main stumbling blocks for negotiations collapsing initially. However, the disposal of GVC’s Turkey-facing business in November for €150m helped pave the way for Ladbrokes Coral takeover talks to move forward and focus on to the issue of FOBTs.

And in an attempt to circumvent the risk of a £2 maximum stake, GVC came up with a deal structure described by one analyst as a “beautifully simplistic mechanism” for giving piece of mind to both GVC and Ladbrokes Coral shareholders. The 160.9p per share deal (£3.1bn) includes up to an additional 42.8p ‘contingent value right’ linked to the outcome of the triennial review, which would potentially take the total offer up to £3.9bn. Following the deal, GVC shareholders will hold 53.5% of the enlarged group share capital and Ladbrokes Coral shareholders will own 46.5%.

“We’ve been proven right in the past by doing deals and I’m sure this one will deliver a similar set of returns”

“We started speaking to them [Ladbrokes Coral] in Q4 2016 and there was an eagerness from both parties to do something as it makes strategic sense for both of us,” Alexander says. “But the triennial review was clearly the sticking point with the uncertainty around it, and we’ve managed to come up with a structure for the deal that rewards Ladbrokes Coral shareholders whatever happens with the review and also protects GVC shareholders from overpaying. So once we thought of that idea we were able to get the deal over the line.”

But just how innovative is this deal structure? And was GVC ever tempted to just wait until the outcome of the triennial review before finalising the deal? “It is quite innovative, but anyone else could repeat it quite frankly,” Alexander claims.

“We’d been talking to them for 14 months and this triennial review has run on and on and on,” he continues. “There was keenness from both parties to kick on and get a deal done, so if we can come up with a structure that protects GVC and Ladbrokes shareholders, there was no real reason to wait. There is a lot of value which can be created for shareholders, so why delay it at all?

“I think 2017 was a much quieter year in general [for M&A] mainly because of the triennial review and the uncertainty around it. To be honest, if we hadn’t come up with the structure to protect GVC shareholders, we wouldn’t have done a deal. Once the triennial review unravels, then you will almost certainly see more consolidation. On the presumption that it reaches a conclusion during the first half of 2018, that will kickstart more M&A. So there will be more deals in 2018 for sure.”

UK powerhouse

Although he’s unsurprisingly not forthcoming in revealing any names, Alexander admits GVC had looked closely at a “number of potential targets”. Indeed, rumours of a play for Ladbrokes Coral’s biggest rival on the UK high street, William Hill, were commonplace over the last couple of years. But Lads inevitably became “by far the number one choice” for GVC, according to the chief exec, as the operator continues its ambitious quest to create one of the gambling sector’s biggest powerhouses.

Alexander adds: “In terms of priorities, this is the biggest deal we’ve done and I think of all those we’ve completed in the past, this is the one that excites me the most. This is the one where we can unlock the most shareholder value compared to the other deals we completed previously.

“I’ve said repeatedly that if you don’t have diversification, scale and, quite frankly, you don’t control your own technology, you’re not going to win or survive in this sector for very long. I’ve been saying this for years and one of the biggest assets when we acquired bwin.party was their technology which we think is very strong and market-leading. Now we’ve got Ladbrokes Coral, we’ve got more diversification and we can leverage off that technology as well.”

“This is the one where we can unlock the most shareholder value compared to the other deals”

And it’s not hard to see why Alexander is so exuberant about GVC’s most recent business win. The size of the combined group makes for some eye-watering reading, with full-year net gaming revenue of more than £3bn, which is split almost 50:50 between online and retail. While it remains behind bet365 on a pure online revenue basis, the group is nearly double the size of its comparable multi-channel rivals such as William Hill and Paddy Power Betfair, which are both on about £1.6bn a piece.

Meanwhile, the enlarged group will boast more than a dozen familiar and successful multi-vertical brand names, as well as formidable cross-channel positions across a number of Europe’s most important markets, including Germany, Italy and France. In addition, the group will also have similarly favourable positions further afield in the US and Australia, particularly in the latter where Ladbrokes.com.au has gone from strength to strength in recent years.

More importantly, however, it provides GVC with exposure to the retail side of the industry for the first time and a much stronger foothold in the €6.2bn UK online gambling market, where it admits it has been “underweight” for some time. Now the operator has added more than 3,500 UK betting shops and two of the country’s leading online bookmakers in Ladbrokes and Coral to its name, it has significantly increased its UK revenue mix from 10% to approximately 67% of total revenues.

Change of approach

And in a major turnaround compared to previous years, GVC will also become far more reliant on locally regulated markets in line with current industry trends.

“We were underweight in the UK and Ladbrokes Coral allows us to get into that market, as well as Australia, and we’ve transformed the grid from being 67% regulated and locally taxed to being over 90%, which I also think is very important,” Alexander says. “If you go back eight or nine years ago, we did exploit unregulated markets and that was the right strategy to pursue, but where the future is headed now is different.

“We will acquire some great brands in the UK with Ladbrokes and Coral and we also get ourselves into Australia. There is also a lot of talent at Ladbrokes Coral and a very strong management team and in the enlarged group there will be a combination of the very best of GVC talent and the very best of Ladbrokes Coral talent. The Ladbrokes Coral business itself has also been performing reasonably well and just ticked all the boxes we were looking for. Their Australian business has also been performing very strongly.”

Since Alexander took charge of GVC back in 2007, the operator has completed four major transactions. Together, these deals have changed the firm from a fairly small player in the global online gaming market to one which has become the industry’s leading consolidator and has cemented a top three position in EGR’s Power 50 over the last couple of years.

Firstly, there was the acquisition of Brazil-facing bingo and sportsbook brand Betboo in 2009. However GVC really made its mark four years later via the company’s acquisition of Sportingbet in partnership with William Hill, while its successful £1.1bn deal for bwin.party got the City purring. The latter acquisition also enshrined Alexander’s status as one of the industry’s most successful dealmakers after snatching the deal away at the last minute from favourite 888 in a fierce battle.

And while the triennial review caused plenty of headaches, the Ladbrokes Coral transaction appears to have been far less troublesome. “I think the bwin.party deal was the hardest one to get over the line because it was a much more competitive process. The bwin.party deal was tough – obviously 888 was made a recommendation and then we won it off them. But out of all the deals, this one with Ladbrokes Coral is the biggest and most exciting one we’ve done to date.”

What all these deals have in common, however, is a seemingly consistent level of success. GVC shareholders have seen a 392% return since the Sportingbet acquisition and 105% since bwin.party, helping them to a total 3,034% return over a 10-year period. This is clearly a tough act to follow for GVC’s management team but Alexander is clearly confident they can deliver to shareholders once more.

Teething problems?

Despite GVC’s strong track record, some questions and uncertainties still remain. The operator has yet to quantify specific synergies, although management has previously said such a deal could generate at least £100m, which would likely be found by migrating Ladbrokes Coral on to the bwin platform and staff reductions. Numis Securities predicts costs savings of more than 6% of group revenue, which would be higher than the Paddy Power Betfair merger but nearly half of those accumulated from the bwin.party deal.

Alexander believes the migration will lead to continual improvements of the Ladbrokes Coral products

Ladbrokes Coral’s reliance on Playtech – a contract which still has four years left to run – and the myriad of problems that can arise from complicated technology integrations are also a potential worry. For example, some analysts have pointed out how previous industry mergers have often led to reduced product development, not to mention that Ladbrokes Coral is itself in the immediate aftermath of its own integration. However, GVC has vast experience in completing successful integration projects and Alexander appears unworried about any potential teething problems this time around.

“I’m pretty relaxed about the integrations as we’ve done two before. We integrated Sportingbet into GVC and then we successfully did bwin.party – so the two we’ve done to date have been an unqualified success,” he says. “As you do these integrations, you get more experience of doing them and we’ve got very good technology and people who’ve done them before. So I’m not concerned about it and don’t see how the Ladbrokes Coral one is going to be any different, even if they’ve just done their own.”

“If you don’t have diversification, scale and your own technology, you’re not going to survive in this sector”

Alexander adds: “Product development was a concern when we did the deal with bwin.party and we managed to completely improve the bwin and PartyGaming product offering while at the same time integrating the businesses as well. We aim to do the same this time and expect the Ladbrokes Coral product offering to be continually improved.”

Alexander still remains vigilant about the size of the task at hand. The size and complexity of this deal is on a completely different scale to what it has undertaken previously and there is little room for error in such a competitive market like online gaming. And if the CEO’s prophesy of even more industry M&A in 2018 indeed comes to fruition, GVC could soon face rivals with heightened scale and renewed vigour.

But such predictions also beg the question: will GVC play an active role in consolidation once again this year? “We’ve got a big, big job to do with integrating Ladbrokes Coral and we need to get on with this and making the deal work,” Alexander says. “I think it’s unlikely we will be doing any more in the next 12 months, but I’d never say never.”