Investors are hoping Ladbrokes’ (LAD) long period of operational underperformance will reverse when its merger with Gala Coral completes, but analysts at Liberum warn there is a significant risk this won’t happen.
Once a leader in the UK high street bookmaking industry, Ladbrokes has fallen behind its peers as it failed to establish an online proposition quickly enough and under-invested in its shops.
Its balance sheet has weakened, which meant it couldn’t invest the required amounts to turn the business around.
Investors hope its merger with Coral will be a new dawn. The deal gives it greater scale, enhanced marketing power and a much more profitable online business.
Liberum analyst Jason Holden says there are several risks which are potentially value destructive:
- Ladbrokes is too far behind in the online race, with only a 5% share of the online market. A major investment in marketing is required to change this.
- Coral has a more profitable online business but marketing efforts will be spread across a dual brand strategy. The combined balance sheet, which will have £1 billion of net debt, will constrain investment, Holden says.
- The restructuring required to meet the Competition and Market Authority’s conditions is an unknown factor.
- Ladbrokes is the most exposed of its peers to further rises in UK gaming duty because of its high geographic concentration and relatively low profitability.
- Ladbrokes has a forecast price to earnings ratio of 21, which is high given the risks.
Liberum’s target price is 106p, 15% lower than the current share price of 124.8p.