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GVC - Government sets two pound FOBT limit

George Salmon | 17 May 2018 | A A A
GVC - Government sets two pound FOBT limit

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After a lengthy review, the UK Government has announced a new cap of £2 per spin on fixed odds betting terminals (FOBTs).

GVC expects this to reduce earnings before interest, tax, depreciation and amortisation by £160m in the first full year following the change. However, it is also confident of mitigating some of these lost earnings such that the longer-term impact is around £120m. It expects to retain a profitable and cash generative UK High Street business.

The result means the CVRs issued to Ladbrokes Coral shareholders at the time of the merger will have zero value.

After initially falling, the shares recovered to rise slightly on the day of the announcement.

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Our view

Just as a merger between Ladbrokes and Coral to create the UK's biggest high street bookmaker was bedding in, GVC swooped to acquire the combined group.

The scale of the deal makes it all-important to the group's near-term prospects.

GVC as an online sports betting and gaming specialist, while Ladbrokes Coral's 3,500+ shops gave it more of a bricks and mortar focus. They also differ geographically. GVC has an international focus while the lion's share of Ladbrokes Coral's revenue is generated in the UK. This should mean the two dovetail nicely. Ladbrokes shareholders become less tied to a struggling UK high street, while GVC's exposure to unregulated markets falls.

The question is whether the group can pull it off.

GVC is something of a serial accumulator, and the successful integration of means recent form has been good. The group anticipates meaningful earnings growth straight off the bat and says at least £100m of cost savings are there for the taking. It's good to see this remain unchanged even with the headwind of a lower maximum stake on FOBTs.

The takeover was a mixed cash and share deal, and net debt will rise to close to 3 times cash profits. However, GVC should be capable of generating sufficient cash flow to pay off the extra debts soon enough, while still paying a dividend. The prospective yield is currently 3.6%.

There's potential for GVC to expand even further, enticed by new markets coming online. The group expects the German market to open up soon, and the US is opening its door to sports betting. This provides a huge opportunity.

Around $150bn is thought to be wagered on the underground market every year, and this will surely rise as barriers to betting are removed. For the UK bookies, the chance to tap into this huge potential could mean lost machine revenues are more than replaced.

But the road ahead may not be entirely smooth. The change to FOBT stakes is just the latest example of how things tend to get tougher rather than easier when countries are fully regulated.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.