Rank-Gala deal referred to Competition Commission

Rank Group’s proposed £205m acquisition of 23 Gala Coral-owned land-based casinos has been referred to the Competition Commission, the final step required before the deal can be given the green light.

The referral was made by the UK Office of Fair Trading (OFT) less than one month after Rank’s shareholders approved the deal, which would see the company increase its land-based casino estate to 58 properties, overtaking Genting as the largest casino operator in the UK.

If cleared by the Competition Commission, the deal will allow Rank to expand its Grosvenor Casino brand into 11 new cities, a move which CEO Ian Burke (pictured) has said “Will accelerate the growing awareness of the brand and support the development of a multi-channel gaming business.”

Talks between Rank and Gala Coral had initially broken down in March this year, when the mooted deal was worth £250m and covered 24 casinos, but were revived in the following months, and a conditional agreement between the two parties was reached on 14 May.

Following the OFT announcement, Rank Group has issued a statement explaining that it “Is considering the implications of this decision and a further announcement will be made in due course.”

Last week saw Rank announce a 3.4% year-on-year revenue increase to more than £600m for the year ended 30 June, but much of the growth was provided by the operator’s online arm, particularly the meccabingo.com and grosvenorcasinos.com brands, with the division contributing 13% of the company’s full-year revenues.

Gala Coral also recorded notable online growth in its recent full-year results, with 24% year-on-year increase in turnover from its egaming division contributing to a 9% increase in overall group turnover to £275.2m.

Analyst Simon French of Panmure Gordon described the OFT decision as “surprising”, saying “The Competition Commission report is not due until 3 February 2013. As such there is the possibility Rank withdraws from the deal and looks to return cash to shareholders instead.

He issued a ‘Hold’ recommendation on Rank shares, saying “We believe it will wait for the findings of the Competition Commission given that we believe consumer interests (which appears to be the OFT’s main concern) are not negatively affected by the merger. Alternatively it could let the deal lapse and then resurrect it following the publication of the report in February.”

Meanwhile, despite calling the referral “frustrating and disappointing,” analyst Nick Batram of Peel Hunt retained his firm’s ‘Buy’ recommendation.

“If the deal doesn’t go ahead Rank still has an ambitious organic strategy that could deliver a 50% increase in G casinos over the next 3-4 years,” Batram noted.

It is not the first time that an egaming acquisition has come under scrutiny from the OFT this year after Betfred announced that it was to sell 25 of its UK betting shops to rival operator Stan James in a £5m deal, following its acquisition of The Tote in June last year.

Under the terms of its £150m acquisition of the state-owned bookmaker, Betfred was required to sell off the stores in order to comply with competition rules, with the Office of Fair Trading decreeing that areas with a high concentration of Betfred and Tote betting shops gave customers little choice as to which operator to place their bets with.

Following the acquisition Betfred had added 517 Tote shops to the 840 it already operated.