GVC Holdings to Acquire Ladbrokes Coral for Up to £4 Billion

As they say, the third time is the charm. After trying and failing to firm up a deal to buy Ladbrokes Coral Group twice in the past twelve months, GVC Holdings has finally gotten over the hump, coming to an agreement to acquire the UK sports betting giant for as much as £4 billion.

According to the announcement from GVC, the parent company of partypoker and Sportingbet, Ladbrokes shareholders will receive 32.7p in cash for each share of Ladbrokes stock plus .141 shares of GVC for each share of Ladbrokes. There is also an additional 42.8p contingency on top of that, which we will get to shortly. First, let’s do the math on this deal.

GVC and Ladbrokes are using the closing price of GVC’s stock on December 21st in their calculations for the deal, which was 934p per share. Thus, the base stock portion of the acquisition price (.141 shares of GVC per share of Ladbrokes) comes to 131.69p per Ladbrokes share. Add that to the cash portion and we get 164.39p (it is rounded to 164.4 in the announcement). Tack on the contingency part and the price escalates to 207.19p (rounded to 207.2).

With 1.91 billion shares of Ladbrokes stock outstanding, the total acquisition price could be as high as £3.958 billion.

In Friday’s announcement, John Kelly, Chairman of Ladbrokes Coral, said:

In its relatively short time as a merged entity, Ladbrokes Coral has demonstrated why scale can be so effective in this market. The management team have delivered a very successful merger that has created a leading betting and gaming business built on strong brands well positioned in key markets. We have a leading multi-channel offer that utilises our retail and on-line businesses and offers us a promising future.

Notwithstanding that, the Ladbrokes Coral Board believes that the proposed combination with GVC accelerates our strategy to improve the customer experience, drive faster online growth and build a more diverse and extensive international portfolio of businesses.

The Acquisition has compelling strategic rationale allied to an opportunity to use the best of both from proven management teams and will create material shareholder value. It secures earlier delivery of our long-term value potential, which is why the Board of Ladbrokes Coral has unanimously recommended GVC’s offer.

Now, let’s discuss that contingency, which is worth about a quarter of the deal’s base price. The UK gaming industry is waiting on a January announcement of possible market restrictions to be put in place by regulators. The potential restrictions have to do with fixed-odds betting terminals (FOBTs), located in brick-and-mortar gambling shops throughout the country. Ladbrokes operates about 3,500 of these shops and made about £800 million in revenue from gaming machines last year.

The UK Gambling Commission (UKGC) is considering slashing the maximum bet at FOBTs. Right now the, max bet is £100, but the UKGC may cut that in half to £50. Some anti-gambling groups are pushing to see the number tumble all the way down to £2. If the top FOBT bet is cut, it will clearly have a significant effect on Ladbrokes’ potential revenue, hence the contingency put in place. If the UKGC does not adjust the maximum bet downward, Ladbrokes shareholders will be paid the contingency (it is a bit more complicated than that, but let’s just keep it simple, as the issue at hand remains the same regardless of the exact amount of the contingency that gets paid).

As mentioned, this is the third time in the past year or so that GVC has tried to acquire Ladbrokes. In December 2016, the first round of talks broke down. That offer was rumored to have been for £3.2 billion, a 30 percent price premium over Labrokes market capitalization at the time. It would have been a mostly stock deal.

The second attempt fell apart this August. This deal would have been for 140p per Ladbrokes share, equating to a total offer of £2.7 billion. Word was that GVC was willing to pitch in another 50p per share, presumably similar to the contingency in this week’s offer. Ladbrokes’ stock price at the time was 119.6p share.

For comparison, if Ladbrokes would get full value out of the current deal, it would represent a 19.1 percent premium over its closing price of 174p on December 21st. Ladbrokes share price has shot up this month, as it was just 135.7p on December 6th, the last day before the start of the offer period. Thus, compared to that point, GVC would be paying a 52.7 percent premium.

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