By Liam Proud
LONDON (Reuters Breakingviews) - Bookmakers adjust the odds to make sure they can make money whatever happens. GVC’s 3.9 billion pound bid for Ladbrokes Coral Group is trying to do something similar, by using financial engineering to hedge the risk of a government clampdown on its target’s business.
The Foxy Bingo owner’s announcement on Thursday, the third time in a year it has been in talks with the bookmaker, was a surprise. Most analysts had expected GVC to wait until the outcome of a regulatory review of fixed-odds betting stakes, expected early next year, which could knock a fifth off of Ladbrokes’ operating profit, according to Investec.
Moving quickly makes sense. There’s strong logic behind a tie-up, which could create a group spanning traditional bookies, digital sports-betting and online bingo. Berenberg analysts reckon slashing costs could bring 160 million pounds of savings. Taxed at Ladbrokes’ 15 percent rate and capitalised, they’re worth 1.4 billion pounds, over half its undisturbed market capitalisation. The enlarged group would also be well-positioned to expand into the U.S. if the Supreme Court finds in favour of legalising sports betting.
The key to the deal is a funky contingent value right, which will pay out different sums depending on the outcome of the review, which is likely to set a cap on gamblers’ stakes. Using GVC’s Wednesday closing price and assuming the most benign outcome of the consultation, the deal values Ladbrokes’ equity at 3.9 billion pounds. If the government caps stakes at 2 pounds, likely to do serious damage to the business, the bid is worth 3.1 billion pounds. That range of outcomes roughly matches the potential hit to operating profit.
But GVC is still taking a risk. The contingent value rights are structured around seven discrete stake caps. But the measures might fall outside that range if the government tries other means of discouraging fixed-odds machines, like setting minimum time periods for games. GVC’s hedge might not cover the full extent of the damage. In that case, an as yet unidentified independent expert would get a say, but it could get messy. The benefits of moving quickly probably outweigh those risks, but GVC’s bid isn’t as perfectly hedged as it seems.
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