TEXT-Fitch says Ladbrokes' online weakness offset by retail performance

Thu Aug 2, 2012 10:10am EDT

Aug 2 - A heavy fall in profit at Ladbrokes' online arm is not currently a concern for the group's credit profile as the weakness has been balanced by a strong performance at its high-street business and a bigger-than-expected drop in net debt, Fitch Ratings says. However, if underperformance continues, leading to higher risk of debt-funded M&A, or if the group makes significant changes to its capital structure, then the potential for leverage to rise could become a concern. The bookmaker's almost 50% drop in online profit in 1H12 is poor compared to rival William Hill, where online profit rose 23%, and reflects delays in updating its technology platform as well as a step up in marketing expenditure. But revenue in the division still grew, indicating it is holding on to customers ahead of a re-launch at the end of the year. In the meantime, we believe a strong performance from the high-street arm - in particular from new gaming machines - will offset the online weakness, helping keep free-cash-flow strong and net debt falling at end-December 2012. However, Ladbrokes' ('BB+'/Stable) rating headroom remains tight and action such as debt-funded M&A or an increase in leverage could put pressure on the rating. We believe the prospect of M&A has fallen after Ladbrokes walked away from talks with 888 Holdings and Sportingbet, but a prolonged downturn in the online business could lead the company to resume the search for an online partner. The group's statement that it may review its capital structure next year would also be a concern if it leads to an increase in leverage. We revised the group's Outlook to Stable from Negative in March, citing its improved competitive profile. At the time we said that a largely debt-funded acquisition or an increase in net lease adjusted leverage to more than 3.0x over a 12-18 month period could lead to negative rating action.

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