What the analysts said: Making sense of the GVC-LCL deal

GVC Holdings this morning announced it was in “detailed discussions” over a potential acquisition of Ladbrokes Coral, just a few months after it was announced previous talks had collapsed.

EGR Intel has rounded up industry reaction to the news, with analysts weighing up the pros and cons of the potential £3.9bn mega-deal.

Morgan Stanley

We think the combination makes sound strategic sense given the significant synergies (we estimate this combination could generate £70-100m of synergies based on previous benchmarks, amounting to 15-20% of pro forma PBT). It would also create a more diversified group (lower Retail and UK exposure for Ladbrokes Coral), and one whose scale would provide optionality for further M&A in a fragmented market.

Regulus Partners

The two biggest risks to the combined group would be diluted and partially mitigated. On an EBITDA drop-though basis, B2 revenue would represent c. 37% post synergies (not all of which would be lost in any scenario), and Germany c. 10%; perhaps crucially £100m of synergies as well as the diversification is a big mitigation also. In broader terms, remote mix would be 50% (pre DDCMS impact), UK exposure would be c. 60% and domestically regulated revenue exposure (excluding Germany), would be c. 88%. The brand reach would also be an impressive mid-tier multi-product roster (of former hospital cases): Ladbrokes, Coral, Eurobet, Bwin, Party, Sportingbet, Foxy, Casino Club, Betboo and others. In our view, this diversification makes the deal highly attractive for both companies.

The big question for investors is the risk of both a severe FOBT outcome and a severe Germany outcome. Both of these could reasonably occur in broadly similar timeframes (Q418-Q119) and the combined impact could easily be over £300m of EBITDA. In this scenario a (a by no means unlikely one, in our view), about a third of EBITDA is cut and both valuations and corporate flexibility are significantly impaired: the fact that such an outcome would not be existential may be cold comfort…

Alun Bowden, analyst, Eilers & Krejcik

What is interesting about the excitement around the GVC-LCL deal is there is basically zero precedent for major online gambling mergers being successful so far. This is going to be a sprawling multi-brand, multi-region monster that is going to be incredibly hard to drive synergies and strategy on. There are so many ways this can go wrong, from tech integrations to the issues around retail. Also it’s worth noting that LCL is in the middle of its own integration, so you need to solve that problem first. The Playtech relationship is also an interesting area to watch and how that plays out could dictate the success of any future integrations.

Coral appears to be performing well but it will be interesting to see if GVC takes the same approach he’s used on Sportingbet and bwin with Ladbrokes, stripping costs, sharpening trading and making it lean and efficient. Management probably thinks it can drive huge value there and may well be right as it still has huge brand cut-through, although Ladbrokes is just one of the many moving parts here. What the deal creates is a genuine European giant with a strong presence in Italy, Spain. Germany and the UK with three or four very powerful brands. There are plenty of reasons things can go well but there is so much brand and technological complexity, the downside risk is meaningful and post-deal execution will need to be absolutely spot on. I certainly wouldn’t rule out GVC management pulling it off though.

Credit Suisse

Ladbrokes Coral has four years left on its contract with Playtech, which is installed from front to back across both its retail and online operations. Large scale technology platform migrations tend to be risky and software contract buy-outs can be expensive.

Goodbody

From GVC’s perspective there are numerous positives which include 1) synergy potential; 2) increased regulated revenue exposure; 3) diversification and 4) increased scale. The key question for investors is the exposure to such a large retail business. While there are merits to a multi-channel approach, even outside of the triennial review, UK retail is not growing and could potentially act as a drag going forward. However, we believe that GVC management has a strong track record and investors will be willing to back management to find a long term structure whereby retail will not dilute the overall growth profile of this group.

Barclays

We think the announced LCL/GVC deal make sense for LCL shareholders for 5 core reasons but we highlight 3 big risks.

Positives: i) Geographic diversification (diversifying LCL’s c. 85% revenue exposure to the UK and thus reducing regulatory risk in the UK), ii) Scale (scale is one of the most important attributes for online gambling companies improving ROIC in the long run), iii) Technology (LCL will have access to GVC’s proprietary technology which ultimately means the proposed combined entity would reduce exposure to revenue-share agreements with software providers), iv) Synergies (the cost synergies generated by the PPB deal were £65m and for Ladbrokes Coral it was £150m – it seems logical to consider this a useful range).

Risks: i) The biggest risk is that the technology integration reduces the focus on new product development and thus impacts growth in the core online division. Ladbrokes.com is current losing UK market share (wagering -9% for the last 4 months). Set against this backdrop, we believe a large scale technology integration will be fraught with potential challenges. We rate the management team of LCL highly, and note that GVC has been an acquisition engine in recent years (buying bwin and Sportingbet for example) so is aware of how to integrate businesses well. ii) Key staff departures. iii) Multiple brands in multiple countries: will brands need to be removed?