Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The owner of Sportingbet and Partypoker is hurrying to buy bookmaker Ladbrokes Coral Group Plc at the speed a punter cashes in a winning betting slip. With the outcome of a government review of the industry far from certain, the move is a gamble. But GVC Holdings Plc has done its best to hedge its bet.

Winner Takes All
GVC is exploiting a strong share price in making a cash-and-shares bid for Ladbrokes
Source: Bloomberg

Buying Ladbrokes would give GVC added scale that would make its high technology and compliance costs go further. Additional geographical diversification would help GVC cope better with unexpected regulatory changes in any one of its local markets.

For these benefits, the purchaser is willing to take on some additional risk. The cash portion of the proposed 3.1 billion-pound cash-and-stock takeover GVC unveiled on Thursday would boost leverage to roughly three times Ebitda. That's high for a gambling company, but a more diversified business ought to have greater capacity to sustain that.

GVC would also take on sizeable exposure to old-fashioned betting shops -- a challenged part of the industry with an uncertain outlook. The British government wants to cut the maximum stake for fixed-odds betting terminals, threatening a lucrative source of income for the industry.

Depending on the outcome of that review, Ladbrokes shareholders will get additional payments through a so-called contingent value right loan note.

Terminal Value
GVC's Ladbrokes offer gets a lift depending on what the U.K. lets people bet on terminals
Source: Company statement

Ladbrokes' undisturbed market value of 2.6 billion pounds probably reflects the expectation the government will cap the bet at 20 pounds, with an additional discount for the surrounding uncertainty.

If that base case turns out to be right, the top-up payment on the deal would cost 600 million pounds. This would be paid by enlarged company, which would be 46 percent owned by Ladbrokes shareholders. So they would pay nearly half of it themselves, bringing the total value of the deal to them to 3.4 billion pounds.

At the same time, the underlying value of Ladbrokes would be worth more than what the market was ascribing to it before the announcement -- call it 2.8 billion pounds, and the takeover premium is about 600 million pounds.

GVC has said it expects to reap unspecified synergies. These could come close to covering this premium. The combined market value of the duo rose by 1 billion pounds on Thursday. If the value creation is comparable, GVC can afford the takeover, based on its more-than-half share of those gains.

Still, there are plenty of uncertainties here. It's not clear what the CVR will pay if the government does more than snip maximum bets -- for example by cutting the number of betting terminals, or making games slower. The underlying value of Ladbrokes is unclear.

Clever GVC. It's put some certainty on an uncertain situation, and might end up getting Labrokes shareholders to pay for at least part of its own bet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net