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.

Ladbrokes online revenue

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.

LADBROKES - Comparison Line Chart (Rebased to first)

Liberum analyst Jason Holden says there are several risks which are potentially value destructive:

  1. 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.
  2. 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.
  3. The restructuring required to meet the Competition and Market Authority’s conditions is an unknown factor.
  4. 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.
  5. 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.

Issue Date: 28 Jan 2016