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IN-DEPTH 18 January 2016
A race to consolidate
David Cook delves into the planned mergers of Ladbrokes Coral and Paddy Power Betfair and how they are expected to play out
By David Cook

Multi 21 was a phrase that made a number of headlines following the events of the 2013 Formula 1 Malaysian Grand Prix. Red Bull’s Sebastian Vettel, the then three-time and reigning world champion, caused controversy by ignoring the order of “multi 21” from his team, a command that instructed him to allow team-mate Mark Webber to remain ahead of him in first position. Vettel instead opted to pass Webber and take the race victory. Webber and Red Bull were not exactly amused by the German’s actions. The instruction, despite being ignored by Vettel, symbolised that protection from a closely linked competitor can be integral to achieving success. In the eyes of Red Bull, two drivers working together were deemed more important than the individual. At this time, multi 21 could well be the term that best describes the future of the UK gambling market.

The recent theme of global consolidation has now spread to Britain – with the planned Ladbrokes Coral and Paddy Power Betfair mergers – and has thrown up a number of questions and theories about the future of the industry and the manner in which teamwork will be crucial to success.

Ladbrokes and Coral became the industry’s hot M&A topic in July when they confirmed the merger. The recommended merger, which at the time of writing is still subject to clearance from the Competition and Markets Authority, is to be paid for by a financing of £1.35bn supplied by a syndicate of relationship banks. Ladbrokes Coral plc will have net revenue of £2.1bn and £392m EBITDA.

It has been a noteworthy year for Ladbrokes, with the proposed merger following a change in CEO. Jim Mullen, who will be CEO of Ladbrokes Coral, replaced Richard Glynn as Ladbrokes’ boss in April. Last year, under Glynn’s leadership, Ladbrokes’s pre-tax profits plummeted 44% to £37.7m.

Gambling consultant Steve Donoughue says: “Look at where Ladbrokes was before Richard Glynn turned up and look where it is now. What that man has done is criminal. Glynn, who will probably go down in history as the worst bookmaker ever, has destroyed Ladbrokes."

When the deal was announced the operators said the Coral group is to be delivered with net debt of £865m. When the financing for the deal was announced, Ladbrokes that Gala Coral’s debt will not be transferred to the enlarged group at the completion of the merger, without explicitly referencing whether or not this referred to the net debt.

Donal McCabe, Ladbrokes director of external relations, has made an optimistic prediction, at least on the digital side of the future Ladbrokes Coral operations. “What you’ve got is two very strong brands that are currently probably sixth or seventh in the digital market,” he says. “Combining the scale of Ladbrokes and Coral, even though you’ll have the brands running separately, we’ll still be about third in the market, but you start to get some scale.” Gala Coral was not able to comment for this article at the time of writing.

Richard Glynn, who will probably go down in history as the worst bookmaker ever, has destroyed LadbrokesSteve Donoughue
Those that have been around the industry for a while will know that this is not the first time that plans for Ladbrokes and Coral to negotiate a merger have surfaced. Ladbrokes tried to buy Coral in 1998 but the plans were scuppered when the then UK secretary of state for trade Peter Mandelson blocked the deal, stating that it “would damage competition and disadvantage punters”. But like in any love story where the protagonists seem destined to be together, it seems as though their separation is not to last. The reason for the companies coming together this time may just be a result of natural market developments. Donoughue says: “The difference from last time is that shop retail was everything back then. Now, retail is less and less important. In terms of the market, the growing market is mobile, so to say it’s all about the shops is old fashioned. I don’t see any problem with the merger from a regulatory perspective.” Ladbrokes closed 89 shops last year and plans for 60 more shop closures were announced in February.

Paddy Power and Betfair announced they were joining the M&A party the month after the Ladbrokes Coral merger plans were confirmed, with 52% of the merged company to be owned by Paddy Power shareholders and 48% to be owned by Betfair shareholders. It was announced in September that the terms of the merger had been fully agreed. The deal is expected to complete in the first quarter of 2016. Paddy Power reported record pre-tax profits of €167m for the full year 2014, an increase of 21%, while Betfair’s revenue ascended 21% to £476.5m for the year ended April 30.

Breon Corcoran, Betfair CEO and the man set to become CEO of Paddy Power Betfair, will in a sense be returning to his roots, having served in various roles at Paddy Power, including COO, from 2001 to 2011. Corcoran then took over as Betfair CEO in 2012. An informed source told Gambling Insider that after CVC Capital Partners made an unsuccessful attempt to acquire Betfair in 2013, there was much talk around Betfair’s offices of M&A, with particularly excitement surrounding the opportunity of working with a company with a land-based presence.

It will be intriguing to see which of these two mergers, should they both complete, is the one to make a stronger case for the idea of joining forces. On this front, Donoughue has made it clear which horse he is backing. He says: “I think Betty Power [as he affectionately calls it] is the best, because it works on a cultural level. Breon Corcoran is going back to his old gang. It works on a product level because Betfair exists on the more sophisticated end of the betting spectrum. Paddy Power exists on the more casual end, so they complement each other rather than duplicate each other.”

So why are these mergers set to occur? Gaming consultant Aideen Shortt argues that they were inevitable given the development of the land-based market. “All of the companies, except Betfair, have betting shops where there has been a clear decline in non-FOBT revenue,” she says. “Therefore the physical resources are becoming more and more of an overhead. Also, the fact that the UK physical and virtual high street has so much saturation is creating more aggressive and costly marketing.”

With four operators seemingly being tied up, what are the chances that we will see more consolidation in the space? Ladbrokes' McCabe says: “Everyone predicted this might happen post point of consumption, so I don’t think people would be massively surprised if there was further consolidation.”

Shortt adds: “The UK market still has a large number of independent bookmakers. The online space is saturated, there’s a threat of further regulation and the impact of FOBTs for retail outlets is quite pronounced. With these mega-brands, it wouldn’t surprise me if one or both would merge further, bringing around increased consolidation.”

These are clearly important and changing times for UK operators and, if Shortt’s theory proves to be correct, the market could become unrecognisable in years to come.

The industry is braced to find out whether or not Ladbrokes Coral and Paddy Power Betfair will be just the beginning.
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