Lads-Coral merger stalled for now
Share prices for Paddy Power Betfair took a dive after Credit Suisse analysts took a dim view of the company, a combination of two UK gaming giants that merged in February.
That merger vaulted the company to the FTSE 100, a list of the top 100 companies on the London Stock Exchange, but the analysts said share prices have been overstated, reported the Guardian.
“We feel that cost synergies alone are a poor rationale for M&A in a growth industry such as online gaming,” said analyst Ed Barking. “Furthermore, we believe that scale is not as important as many believe, and is no indication of potential market share gains. With regards to Paddy Power and Betfair, as both companies already had strong brands, high quality management teams and good product/technology offerings, we question the extent of the benefits from a merger.” According to Credit Suisse, the post-merger share price is “overdone.”
“Given the integration risk and limited revenue synergies, we initiate with an underperform rating,” the team wrote. “The valuation looks expensive versus peers, with only 15 percent of the current enterprise value of Paddy Power Betfair being generated by cash flows over the next five years, compared to 29 percent for William Hill and 28 percent for Ladbrokes, on our numbers.”
The “consensus view” is that scale alone will allow the blended company to “make significant market share gains and achieve strong operational gearing,” Credit Suisse noted. “By contrast, we show that market share gains are very difficult to achieve in the UK, and Paddy Power/Betfair has consistently underperformed the market on a pro-forma view 2010-2014.”
The report sent shares down 250p to £90.80 (US$137), reported the Guardian.
A concurrent report from Davy Stockbrokers says Paddy Power Betfair is likely to grow net revenues 16 percent this year to £867 million (US$1.25 billion), by 10 percent in 2017, and by 8 percent in 2018, according to the Irish Independent. “We forecast that it will have over £550 million in cash on its balance sheet by the end of 2018,” said Davy. “Therefore there would clearly be scope for additional cash returns over time, particularly if the group adopts a target leverage ratio of one times net debt to EBITDA, as was deemed appropriate by Paddy Power previously.”
Davy noted that the company now spends “nearly one-third of (its) entire operating cost base” on sales and marketing. If a successful strategy can be devised that leads to marketing cost savings or simply more efficient allocation of future marketing spend, the potential returns could be substantial.” It foresees online growth in Australia, but will likely shrink in the retail sector in the UK, primarily due to the regulatory uncertainty relating to High Street betting machines, which have come under fire for their supposed addictive qualities, and also for their rapid proliferation across the country.
Meanwhile, another super-merger—between UK betting juggernauts Ladbrokes and Coral—is facing a delay from the Competition and Markets Authority. A decision on the $2.3 billion (US$3.3 billion) merger was due April 18, but has now been pushed back, possibly until the end of June. Speculation has it that authorities still must decide how many betting shops the merged company will have to forfeit to ease monopolistic concerns. One news outlet predicts the combined company will have to sell as many as 1,000 high street stores.
The merger would give Ladbrokes Coral 4,000 shops, far more than William Hill’s 2,400 UK locations, to become the biggest high street operators in the country.
