Ladbrokes’ first half results showed why the bookmaker wants to merge with rival Coral, but some analysts are not convinced a deal will be done.
The company’s profits slumped 43.9% to £24.7m, hit by football losses in January and weaker horse racing margins with “customer friendly results.” Its digital business showed a loss of £12m compared to a £3m profit the same time last year.
There were exceptional items of £78.9m including impairment charges for its retail business and the costs of shutting UK shops. Chief executive Jim Mullen said it would take until 2017 to build a better business, with a short term impact on profitability:
Our first half results reflect the challenge facing Ladbrokes. While we have some encouraging customer trends, we need to reset the business and invest. The results clearly show why we need to change and why we need to do so quickly.
The proposed merger with Coral Group represents an exciting opportunity for the business but, with completion some way away, the focus for me and my team must be on the here and now of delivering our organic plan, building a better Ladbrokes and driving performance towards our 2017 targets.
Numis analyst Ivor Jones issued a hold rating but cut his target price to 110p from 140p:
Ladbrokes published headline interim results on 24 July when it announced the capital raising, profits warning, dividend cut, new strategy and merger with Coral. Today’s interim results announcement is therefore something of a formality.
The most important issue on the horizon is the merger with Coral. The shareholder circular is not due until late October at the earliest. It is possible that Ladbrokes and Coral will be able to satisfy any concerns of the Competition and Markets Authority at the Phase 1 stage, in which case completion could be late 2015/early 2016. More likely, in our view, is that the CMA will proceed with a Phase 2 investigation which will take until mid-2016, with completion of the merger in the second half of 2016.
Third quarter results from Gala Coral are scheduled for 13 August. If these results demonstrate further success from Coral it could encourage Ladbrokes’ shareholders that the merger will, eventually, give them exposure to an attractive growing business.
Once the CMA stance is understood there is potential for another bidder to make an approach for Ladbrokes (or Coral). In the meantime we believe the shares are unlikely to make progress.
Peel Hunt was more positive however:
Ladbrokes faces a number of challenges and that the proposed merger with Gala Coral has yet to capture the imagination. However, our reason for moving to buy remains in place and if anything has been strengthened by the actions taken by chief executiveJim Mullen. There are signs of light, particularly in UK retail, while the enlarged group will boast a high quality management team/board. We believe the odds of a recovery are mispriced with the risk/reward profile representing an attractive entry point.
Ladbrokes shares have slipped 0.1p to 109.9p.
