Labrokes (LAD LN), share price at 1.03 and I think is too cheap, market doesn’t seem to price the potential synergies post Coral merger.
Business: LAD operates 2,209 retail shops in the UK and has 0.9m online users. The major competitor is William HIll (WMH LN) which operates 2, 360 shops and has 2.8m online users. WMW was faster in adopting online, after acquiring SportingBet in 2012. Ladbrokes announced a potential merger with Coral and if completed the merged group would become market leader.
Segments: Retail drives 70% of revenue but in first H1 grew by only +1% as customers shift online, Digital contributes 19% and grew by 6.9%, management aims to bring Digital contribution to 30% of total revenue and grow active users to 1.3m with retail growth at +2%
Merger: LAD proposed merger with Coral in an all-share transaction, where LAD will control 51% of the enlarged group. Management projects cost synergies of GBP 65m and emphasises synergies can increase. Coral reported annual revenue GBP 982m and EBITDA GBP 204m with Net Debt GBP 865m. The implied valuation on acquisition, on today’s market price (21/8/15) is at x6.7 EV/EBITDA, which is undemanding comparing to WMW
This transaction will not be dilutive to LAD shareholders, at LAD trades on x8.8 EV/EBITDA (Net Debt GBP 413m and consensus EBITDA of 160m )
Synergies: Last year LAD spent on Marketing GBP 82m and Coral GBP50m (WMH 130m) , if the combined group manages to save 30% on marketing, using a single brand (GBP 40m) That could create an additional GBP 350m to shareholders (values at x8.8 EV/EBITDA or GBP 0.19 per share post merger, 1.78b shares). The existing cost synergies GBP 65m, valued at x8.8 EBITDA and taxed at 25% would translate to an additional GBP 0.24 per share.
Online: The merged group will command 14% market share in online gaming (Coral 10% + LAD 4%), ahead of WMH 12% and 888 7%. In online sportsbook the combined group will have 9% market share, bridging the gap with WMH 16%
Cash generation: LAD is a cash generating business, in H1 generated GBP 76m +38%yoy.
Last year (pre re-structuring) LAD generated 130m Operating cash flows which is a 10.7% yield on current EV
Stand alone valuation:
Consensus: Consensus appears to be skeptical on whether the deal will receive the green light from the competition commission, but puts less emphasis on the fact LAD operates in a heavily regulated industry where Gambling Commission sets ceilings on maximum stakes and taxes GGR. Additionally, most customers turn to online, with the retail market shrinking, weakening the point that a merged group would reduce consumer choice.
Divi Even on consensus valuation LAD tradex on a discount to competition, rewarding patience with a 3% divi.