Fitch Affirms Ladbrokes at 'BB+'; Outlook Stable

Tue Mar 26, 2013 11:46am EDT

(The following statement was released by the rating agency) LONDON/MILAN, March 26 (Fitch) Fitch Ratings has affirmed Ladbrokes plc's (Ladbrokes) Issuer Default Rating (IDR) and senior unsecured rating at 'BB+' and Short-term rating at 'B'. The Outlook is Stable. The affirmation reflects the demonstrated resilience of Ladbrokes' core UK retail gaming business amidst constrained consumer spending and Fitch's confidence that the company will defend its profits in 2013 despite further challenges including a modification to the tax structure applicable to gaming machines and higher operating costs at its UK retail division. In 2013 and 2014 the online division faces challenges from continuing competition pressure and completion of its relaunch. The affirmation also reflects continuing progress in strengthening Ladbrokes' online business, limited M&A credit risks and a steady de-leveraging. KEY RATING DRIVERS Resilient UK Retail Revenue Despite the economic backdrop and excluding the impact of the Euro 2012 Football Championship, Ladbrokes reported over-the-counter (OTC) net revenue growth of 2.3% yoy for 2012, with an average stake per slip of GBP8.30, down marginally by 0.4%. Machines performed strongly with average gross win per machine per week reaching GBP946 in 2012 - an increase of GBP86 on 2011. Fitch expects machines to remain the main driver of like-for-like retail revenue growth, albeit at a slower pace, complemented by increasing effectiveness in liability management for OTC betting. Static UK Retail Profits 2012 UK retail EBIT was GBP180.7m (up 18.6%) thanks to the strong performance of machines and good cost control despite the larger estate. Annualised EBIT per shop in FY12 reached GBP82,000 (up 15.7%). However, the implementation of the new machine games duty in February 2013 and an increase in content costs is likely to weigh on divisional profits. Fitch thus expects slightly lower retail profits for 2013, with moderate growth thereafter, achieved primarily from more shop openings. Digital Profit Margin Compression Ladbrokes is demonstrating improving performance in terms of product functionality and customer acceptance of its offer following its efforts to turn around this unit. However, a few execution risks remain and 2012 divisional profits dropped mostly due to higher marketing costs. The EBIT margin almost halved to 18%, despite Ladbrokes spending less on marketing in absolute terms than the UK online leader William Hill. Given the continuing requirement to invest in marketing, margin is unlikely to improve materially. Continued Deleveraging Despite sustained investments in capex over 2011-2012, Ladbrokes confirmed its good ability to generate cash flow. In 2012, lower cash taxes and a GBP30m contribution from its High Rollers business on top of recurring free cash flow of GBP30m supported further progress in de-leveraging, with net FFO-based lease-adjusted leverage improving to 2.9x (FY11: 3.4x), a level appropriate for the current 'BB+' rating. Given its payment structure, the M&A transaction announced with Playtech in March 2013 should not compromise this process (see "Fitch: Ladbrokes' Playtech Transaction Unlikely To Hit Ratios" dated 12 March 2013 at www.fitchratings.com). M&A Remains in Background The strong opportunities from a de-regulating European gaming industry and the continuing scope for growth in online gaming maintain a degree of likelihood of M&A. Mitigating M&A credit risk are, in Fitch's view, Ladbrokes' previous hesitance towards M&A opportunities involving legal risks, the preference in online gaming M&A for equity funding and the further strengthening of the business that the transaction announced with Playtech in March 2013 will bring. RATINGS SENSITIVITIES Positive: Future developments that could lead to positive rating actions include - Further strengthening of operations with the achievement of an established competitive profile in online gaming, a fully stabilised UK retail business and lower reliance on the UK market . - FFO adjusted net leverage reducing close to 2x. Negative: Future developments that could lead to negative rating action include: - FCF moving into negative territory. - FFO Adjusted net leverage higher than 3.2x due to poor trading at any given time or for over 12-18 months due to M&A. - A deterioration of EBITDA by more than 20% to 25% over a 12 month period due to difficulties of core UK retail or digital businesses caused by soft consumer spending or loss of competitive strength. Contact: Principal Analyst Graham Barker Associate Director +44 20 3530 1123 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia S.p.A. 1, vicolo Santa Maria alla Porta 20123 Milan Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Rating Methodology' dated 8 August 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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