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GVC - a grand deal

George Salmon | 30 July 2018 | A A A
GVC - a grand deal

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GVC has confirmed a joint venture with MGM, operator of casino resorts including the MGM Grand and Bellagio.

Both parties are contributing $100m, and will have exclusive access to sports betting in MGM's casinos. It is hoped the new venture will be up and running for the new NFL season.

The shares rose 4.8% on the morning of the news.

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Our view

At the end of last year GVC swooped to acquire Ladbrokes Coral in a £3.2bn deal. While the group is also rolling the dice in America, the scale of the Ladbrokes Coral deal makes it more important to the group's near-term prospects.

The two should dovetail nicely. GVC is an international online sports betting and gaming specialist, while Ladbrokes Coral's was the UK's largest high street bookmaker. The takeover means its shareholders become less tied to a struggling UK high street, while GVC's exposure to unregulated markets falls.

The deal looks attractive to both parties. The question is will it be a success?

GVC is something of a serial accumulator, and the acquisition of bwin.party in 2015 means recent form has been good. The group anticipates meaningful earnings growth from Ladbrokes Coral straight off the bat, and says £130m of cost savings are there for the taking. It's good to see this has increased despite the government slashing the maximum stake on fixed odds betting terminals (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 for 2019 is currently 3.5%.

There's potential for GVC to expand even further, enticed by new markets. The group's positive about potential changes in Germany, while the US Supreme Court recently opened its door to legalising sports betting nationwide.

Around $150bn is wagered on the US underground market every year, and this will surely rise as barriers to betting are removed. The deal with MGM, which will combine a big US brand with GVC's technological know-how, seems sensible to us.

While we're on the whole positive about the group's prospects, the road ahead may not be entirely smooth. The change to FOBT stakes is just the latest example of how regulators can sometimes upset bookies best laid plans.

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Trading details (18 July 2018)

A brief update from GVC prior to half year results, due on 13 September, shows year-on-year growth has accelerated from Q1 to Q2, driven by good underlying momentum and the World Cup.

Net gaming revenue (NGR) rose 8%, including a 12% rise in the second quarter.

Online NGR was up 20% over the 6 month period. The football World Cup provided a tailwind, although GVC says underlying growth was strong, as demonstrated by revenues 17% growth in the period prior to the tournament kicking off.

The competition itself is said to have been positive, with good betting volume backed up by strong win margins.

The football and favourable weather helped the group reverse the recent trend for declining like-for-like UK Retail revenue, with second quarter growth of 2% limiting the decline over the half to 3%.

Revenues also rose in European Retail, up 26% in the half against a soft comparative.

Kenneth Alexander, CEO said "The strong momentum across the online business has continued and means we are well placed to deliver against our full year expectations".

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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.