Coverage of the recently announced deal between Ladbrokes and Gala Coral seems to be focusing on the new “largest bookie in the UK” by counting up the number of betting shops between the two. Apparently the answer is 3945. In yet another signal showing how far removed government regulators are from the realities of the businesses they harass, the big story now is that the merged company will have to fight some UK bureau to push the merger through. The bureau will be counting up the number of shops the new company will control, and then if approved, it may be forced to sell a bunch to William Hill or Paddy Power.
So those two are now crowding around looking to take advantage of any forced sales that result from the merger. But the simple fact is that Ladbrokes and Coral are not merging to become the largest bookmaker in the UK, so the number of shops both will now own together is mostly irrelevant. They are merging to become a serious competitor in digital and mobile bookmaking. There are, however, no regulations in place to try to prevent a merger aimed at maximizing digital and mobile market share, which is essentially what this merger is about.
We have already seen how William Hill pulled away from Ladbrokes around the same time that Ladbrokes’ digital efforts were failing. Digital accounted for about 6% of operating profit in 2013. By contrast, William Hill’s digital business accounted for 48%. Up until 2013, the two companies were neck and neck, but Ladbrokes’ digital and mobile failure widened the gap significantly between the two.
The problem was stagnant revenues and increasing costs of doing business. In other words, it’s not that Ladbrokes’ business was shrinking. It was that it wasn’t growing and its expenses were rising. Then it took on PlayTech to completely revamp its digital business, and the move gave some hope for the company because it seemed to be working. Coral also uses PlayTech technology to manage its online business as well, so merging will present less technical challenges while eliminating redundancies.
The other main reason why the number of betting shops doesn’t really matter is that UK politicians are already trying to bite off more than they can chew by slapping a 25% tax on betting machines, a tax that went into effect in March this year. This is in addition to the 15% point of consumption tax that has been in effect since December last year.
New taxes always have unintended consequences, which in this case will be the further shrinkage of machine-based gambling. Without a doubt, the timing of the new 25% tax had its effect in spurring talks between Ladbrokes and Coral. Both saw the trap being closed around them and both were using the same company to expand their escape plan from the brick and mortar to digital.
In a sign of global market weakness surrounding this deal, both LAD and PTEC shares fell substantially yesterday. LAD over two percent on the announcement, which is also partly due to a dividend cut and the issuance of over 92 million new shares. PlayTech shares were down 1.6%. Usually in a deal like this, at least one of the two companies will climb on the news, but not in this case. This says more about general market conditions than it does about the merits of the merger, so worry not.
Besides the distraction with the number of betting houses the combined company will own, a second red herring here is the controversy surrounding the man who will become the Chief Operating Officer of Ladbrokes Coral. Andy Hornby was the former chief of HBOS bank from 2006 to 2008, and he was pinned with the blame when the global financial crisis struck during his tenure, bringing down the bank and inviting a hypocritical censure from politicians regarding his handling of the bank. Because of him and his incompetence, apparently, HBOS nearly imploded.
Let it be reiterated that financial crises are systemic because of the way politicians cartelize the system through a central bank and allow the lending out of demand deposits, which is basically like stacking dominoes in a long row. If you are then going to marvel how one of the dominoes fell and caused the entire stack to come tumbling down, and then blame the guy who knocked one down instead of yourself for setting up the unstable system in the first place, you are deflecting blame.
Let’s not forget that there are no systemic risks in any other industry besides banking where the failure of one firm can endanger the entire sector. And there is no other industry where earnings can look great on paper one quarter and bankruptcy can follow the next, except banking. In all other industries, a company must be failing for a while, obviously, before going bankrupt. A bank, however, can fail suddenly and unexpectedly because of the structure of fractional reserve, not because of the incompetence of a single CEO.
Hornby should do fine in his position. If either company thought that there was a better man for the job, they would have hired somebody else. When politicians censure a business leader but the business leaders themselves hire him, I trust the business leaders. They are the ones trying to make money after all. Politicians are just trying to make a name for themselves by yelling at people and telling them what they can and can’t do by law (law that they make up).
If you’re looking for a way to trade the merger, my choice would be to go long PlayTech rather than Ladbrokes. Ladbrokes will still have to contend with heavy taxes on its machines, whereas PlayTech has no exposure to those taxes. Now, however, is not the time to go long anything, but when money supply starts growing again, PTEC is a smarter move than LAD for when the time comes.
