Shares in Ladbrokes (LAD) surge 10.2% to 134.5p after the UK bookmaker confirms it is in talks with rival Gala Coral over a possible merger of the two companies.

The deal would create Britain’s largest bookmaker with more than 4,000 shops, or 45% of the UK’s total shop estate, significantly more than William Hill’s (WMH) 2,400 shops.

The merger makes a lot of sense as the retail business would be on a much stronger footing and there would be scope for improved savings and efficiencies.

LADBROKES - Comparison Line Chart (Rebased to first)

Coral is a more economical business with its cost per shop 12.5% lower than Ladbrokes in 2014. It is likely that underperforming shops would close, increasing the gross win per shop which would also benefit from less local competition.

The combined company would have a meaningful 15.2% share of the Italian retail market, where Gala Coral increased its share by 3.6 percentage points last year.

Davy analyst David Jennings says the deal is ‘strategically very sensible’ although he questions whether it will be approved by the competition authorities and, if it is, how many shop closures would be required.

Jim Mullen, who joined Ladbrokes as chief executive three months ago, would be in charge of the enlarged company, which is likely to list on the main market and carry out a sizeable equity raise to boost the balance sheet. Jennings suggests the combined entity would seek to reduce its level of gearing from 4.4 times net debt to EBITDA (earnings before tax, depreciation and amortisation) in 2014 to more like 2.5 times.

Ladbrokes has struggled to keep up with its rivals in an era when customers are increasingly opting to gamble via their mobile phones and tablets rather than in betting shops.

In February it said it was going to close 60 shops after revealing a 44% drop in pre-tax profit for 2014, driven by the rise in gaming machine taxes and a disappointing Boxing Day.

Mullen’s focus since joining Ladbrokes has been on building its digital scale. He says the merger has the potential to generate substantial cost synergies, which would create value for shareholders.

Ladbrokes tried to buy Coral in 1998 from its previous owner, the brewer Bass, but it was blocked by the then trade and industry secretary Peter Mandelson, who said it would damage competition.

Issue Date: 23 Jun 2015