Bookmaker Ladbrokes is up 3.5p at 197.25p as the prestigious Royal Ascot meeting begins. But off the racetrack, analysts are pointing to concerns about possible liabilities related to hotel group Hilton International, sold back in 2006.
The hotels were sold to America's Hilton Hotels Corporation, which was itself taken over a year later by US private equity group Blackstone in a highly endebted buy-out.
According to Ivor Jones at Evolution Securities, Ladbrokes has a contingent liabiltity of around £943m as at the end of December 2008. He said:
"Ladbrokes' exposure relates to [the Hilton disposal] where it guaranteed payments under Hilton International's leases, indemnified by the acquiror, Hilton Hotels Corporation. HHC was acquired by funds associated with Blackstone in 2007 in a typical leveraged buyout structure ($21bn debt/$6bn equity). The guarantees relate to payments out to 2042 and Ladbrokes estimated the net present value of the maximum liability to be £430m at 31 December 2008."
What has brought this all back into the spotlight is news that Extended Stay America - bought by Blackstone in 2004 and sold on in a highly leveraged buy-out in 2007 - has gone into Chapter 11 bankruptcy protection. Ivor Jones said:
"[This] should revive concerns over Ladbrokes' exposure.
"With Ladbrokes on a 2009 estimated PE of 8.5 times, investors should be concerned about its exposure to the UK consumer and the US hotel cycle. We reiterate our sell rating and 150p price target."
