Current Price – £1.7
Merger Consideration - £1.68+CVR
Upside – CVR worth up to £0.428
This idea was shared by Alex.
On the 21st of December GVC and Ladbrokes (~£3bn. market cap) have agreed to merge. The enlarged group (both in the gaming industry) will be able to achieve recurring annual pre-tax cost synergies of not less than £100 million as a result of the merger.
Consideration and offer price
Under the terms of the acquisition, Ladbrokes Coral shareholders will be entitled to:
- 32.7p in cash,
- 0.141 ordinary GVC Shares and
- a contingent entitlement of up to a further 42.8p in principal value of loan note plus an upward adjustment for the time value of money by way of a contingent value right (CVR).
Mix-and-match option: shareholders will be able to ask for more cash or for more GVC shares, and such requests will be met to the extent that they can be matched to requests in the opposite direction. There won’t however be any mix-and-match option between the CVR component and the cash/share components, so LCL shareholders will get no choice about receiving a CVR per LCL share. See Mix and Match Facility.
At current prices and using basic offer (no mix and match option) merger consideration is worth £1.69 + CVR. This is almost identical to the current share price of LCL (£1.7). Thus assuming no merger cancellation investors are getting the CVR for free.
Shorting GVC to hedge does not seem to be expensive (1.5$ annual on IB), but IB does not have any borrow availability currently.
Value of CVR
- The CVR becomes a loan note worth between 0p and 42.8p, plus interest at 7% for the first 6 months and 1 day, then 9% until it matures (which it does on the later of 18 months after the effective date of the scheme of arrangement, and 6 months and 1 day after the loan notes are issued).
- The amount that the loan notes will be worth will depend on the result of the government’s review of fixed-odds betting terminals (Triennial Review), in particular on whatever measures the government enacts limiting the maximum allowed stakes on them, how quickly they’re allowed to complete a game, and how many such terminals an operator may operate. See pages 6-9 for more details on CVR value calculation methodology.
- Leaks from within the DCMS reported on 21-Jan in the news prompted sharp drop in LCL shares (under the rumored £2 maximum stakes, the value of CVR is 0). This selloff has created an opportunity with a payoff heavily skewed to the upside. The leaks might be just “politics”. The UK’s opposition parties are lined up against FOBTs, but actually have limited influence over the government’s final decision. Background information can be found here and here.
- Currently market prices a high probability (>90%) that the Triennial Review results in the FOBT maximum stake being set at £2, which would result in CVR value being 0.
- The consultation phase of the Triennial Review closes shortly but the final decision is unlikely to come for a few months.
- The UK Competition and Markets Authority is investigating the GVC and Ladbrokes Merger. A final decision by the CMA is expected to be released at the beginning of April. Donal McCabe, Ladbrokes Coral’s group communications director seems quite confident: “This is a process you have to go through on any deal and we’re not aware there would be any competition issues.”
- The CMA also recommended that prior to the merger, the two separate entities should meet certain conditions to reduce any negative impact on the competition and customer choice. To comply with what was recommended, GVC Holdings and Ladbrokes Coral agreed to sell more than 400 retail shops and thus, to decrease its presence.
- Shareholders of both companies voted for the merger.
- At this stage I consider the risks of merger getting derailed to be quite low (interested in hearing different opinions).
The merger would become effective no earlier than March 28. The new combined business will start trading joint shares immediately, on March 29. Delisting of Ladbrokes shares is scheduled for March 29.
There are conditions pending which could delay the closing but not derail the merger. Merger seems very likely to close and the market is valuing the CVR close to zero. I like those kind of CVR cases where you receive a free option.