Download full report with analyst certification and important disclosures
Jan 25 2018, 06:45 GMT
Press speculation last weekend that the UK government is inclined to introduce a £2 staking limit on FOBTs (fixed odds betting terminals) has led to a 9% fall in William Hill’s market cap and a 4% fall for Ladbrokes Coral (LCL). GVC’s share price has been unaffected, with shareholders seemingly taking the view that the outcome of the Triennial Review is valuation neutral for the group, given that it will pay £584m less for LCL under a £2 scenario. We disagree. We believe that a £2 outcome increases GVC’s pro-forma 2019 P/E multiple from 12.4x to 14.4x and increases its EV/EBITDA from 9.9x to 10.6x. Its 2019 free cash flow yield would fall from 8.2% to 6.5%. That is a material reduction. GVC shareholders have thus far shown indifference to the heightened risk of a £2 staking limit, the suggestion being that the market is happy to pay a higher blended multiple for the stock with more of its earnings coming from online. But again, we’re not really comfortable with that line of thinking; effectively investors are now paying a higher multiple for a business that would have reduced scale, reduced annual cash flows and increased exposure to online regulatory risk than under a £20 scenario. The whole point of acquiring LCL is to maximise scale and dilute online risk. Those benefits are reduced under a £2 scenario.