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And then there were….?

22nd January 2018 9:49 am GMT
The big question following GVC’s successful romancing of Ladbrokes Coral is what now for William Hill? And the Stars Group? And Paddy Power Betfair? And 888?GVC Holdings never ceases to amaze. It might just be doing the same old thing over and over, but it is doing it spectacularly. The latest evidence is the company’s final quarterly update of 2017, which reported a 21 per cent rise in net gaming revenue to €279.5m, a new quarterly record and the highest achieved by the company since the acquisition of bwin.party in February 2016. However, it is not really the financial results that continue to astound but the M&A juggernaut, which rolls on and is just about to consume Ladbrokes Coral. Just two years ago, the idea of an online-only operator acquiring one of the UK’s biggest bookmakers would have been astonishing. That it was not astonishing and furthermore, was greeted with enthusiasm and acceptance by all and sundry is a ringing endorsement of the work that chief executive Kenneth Alexander has put in over the past few years. Alexander is not the only one to have laid down the precedents for this remarkably unshocking megadeal. Amaya opened a whole new world of possibility when it took over PokerStars back in 2014. JackpotJoy (in its previous guise as Intertain) and NYX Gaming Group followed its route to success. However, when it came to bricks and mortar behemoths, it was Scientific Games that acquired NYX rather than vice versa. If the Paddy Power-Betfair deal also paved the way for a successful offline-online union, that deal was billed as a merger rather than an acquisition by the smaller online partner. But GVC is very much in the ascendancy. In acquiring bwin.party and making an apparent success of the integration, it has blown away any vestiges of doubt surrounding the wisdom of M&A in this sector. bwin.party served as a warning sign for any potential acquirer of how badly it can go wrong, but GVC proved that it did not have to be that way. And while others have waited on the results of the Triennial Review and the regulator’s review of fixed odds betting terminals (FOBTs), GVC has come up with a cunning plan to deal with the uncertainty. If the UK government decides to be really nice, the deal values Ladbrokes’ equity at £3.9 billion. If the government caps stakes on FOBTs at £2, which is looking increasingly likely and could do serious damage to the business, the bid would be £3.1 billion. Revenue from FOBTs at Ladbrokes Coral was £802m during the last financial year. So, the range fits. However, revenue from the UK retail estate totalled £1.4 billion. The unknown factor is how many shops might be forced to close down if the FOBT maximum stake is lowered to £2. The industry has claimed as many as 20,000 jobs could be lost but it is hard to determine whether this is a realistic estimate or a political bargaining position.One feels inclined to trust Alexander’s judgement. It has almost got past the stage of questioning it. His grasp of figures is beyond the ken of most mere mortals. In an industry like gambling, where money is the key factor governing all others, that gives him a huge competitive advantage. It also plays beautifully with the City and with his shareholders. As long as the cash is rolling in, they are happy and he is happy. While the bigger is better consolidation mantra of online gaming has proved fairly reliably successful thus far (bwin.party aside), it is possible that eventually Alexander will bite off more than he can chew. As Donald Trump’s 1980s winning streak came to a stunning end with the white elephant largesse of the Trump Taj Mahal, perhaps Ladbrokes Coral will be the beast that cannot be integrated. As Cannacord Genuity analyst Simon Davies writes: “GVC's management capabilities will be tested fully by the Ladbrokes Coral acquisition, but execution of the bwin.party deal has been flawless.” But, truly, this is just a niggling doubt. For the moment, I still trust Alexander to make the right moves. The real intrigue lies in the reaction of the rest of the market. “You could wait forever,” Alexander warned. “People in this industry have been talking for years about consolidation, consolidation, consolidation. We are very ambitious, and very aggressive. They have been sitting on their hands. I don’t know what they’re waiting for.” It might have escaped his attention that Paddy Power has merged with Betfair in the past two years and 888 has tried to merge with just about everyone and failed - due in no small part to the efforts of Mr Alexander himself. The Stars Group also tried to link up with William Hill. While you can call out the opposition for failing to seal a deal, you would be hard-pressed to describe such activity as “sitting on their hands”. One suspects that The Stars Group might well reactivate its interest in William Hill. Stars has strengthened its position since the UK bookmaker’s largest shareholder Parvus Asset Management put the brakes on a merger in October 2016. Its five objections were Stars’ large debt burden, an $870m claim in Kentucky, structural decline in the poker market, limited revenue synergies and limited opportunities for cross-sell. You could easily argue that four of those perceived issues are no more. While the threat of the Kentucky case lingers (without moving), Stars has built a £350m casino business purely on cross-sell and has barely touched the surface of what it is capable of. It has sports betting in its sights and a tie-up with William Hill would speed that process immeasurably. Furthermore, Stars has the back-office infrastructure and a rejuvenated executive management team (minus the troubling CEO David Baazov, whose court case in Canada has recently kicked off), and a governance structure that would improve the decision-making at William Hill, which has been questioned a number of times since Ralph Topping retired. Stars has also pushed poker back into growth and proved how incredibly efficient it is at converting poker revenue to free cashflow. In doing so, it has reduced its debt mountain considerably. It has also recruited William Hill’s former M&A chief Robin Chhabra. If anyone could pull of this deal, one sense it is Chhabra, who knows the ins and outs of both businesses intimately and would be able to structure it appropriately. Indeed, GVC might have shown him one way forward with its clever means of pricing the exposure to the FOBT problem. Similarly, one wonders if 888’s gaming expertise might considerably improve the fortunes of Paddy Power Betfair, which has allowed its casino infrastructure to age and its revenues in the vertical to flatline. Paddy Power Betfair must be the only large bookmaker that 888 has not wooed or been wooed by (publicly). On the surface, a deal makes sense. One can expect such moves, or similar, by spring 2018. Alexander is showing exactly how much money can be made on this M&A merry-go-round and the spectre of bwin.party’s failings has almost been banished by the apparent success of GVC’s takeover and the well-managed mergers of Ladbrokes and Coral and Paddy Power and Betfair. It may still be early days for some of the integration, but Alexander seems to have discovered the golden elixir.sah@gamingintelligence.com
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