* Short interest in UK bookmakers increases
* Shares vulnerable following regulatory headwinds
* William Hill, Ladbrokes shares dropped in past 12 months
By Atul Prakash
LONDON, May 2 Hedge funds are gambling on
profiting from further falls in the share prices of British
bookmakers, who face increased taxes on two fronts and curbs on
how they run their high street betting shops.
According to Markit data, interest from short sellers in
several British betting firms has risen over the past two
months, with Ladbrokes shares on loan climbing to more
than 6 percent of the total available, from 4.7 percent, while
William Hill's shares on loan have risen to 2.6 percent
from 0.3 percent.
William Hill is the market leader and part of the FTSE 100
index of leading British stocks, while Ladbrokes is
Britain's second-largest bookmaker.
Short sellers at hedge funds borrow a security they expect
to fall so they can sell it now, buy back later at a lower
price, then pocket the difference after returning the shares to
Britain this week moved to tighten planning controls on the
spread of betting shops and the high-stakes gambling machines
that make up a growing part of their business.
Local councils can now refuse applications for new shops on
the high street, while cash spend of users on high-stakes games
like roulette has been further regulated.
"You can assume that these companies are going to have a
tough time as they have got several regulatory headwinds," said
Michael Campbell, leisure analyst at Daniel Stewart.
He said the bigger groups, however, were better placed to
mitigate the effects by shutting some shops to cut costs.
"It's also an opportunity for the larger businesses, which
have got a lot of cash, to increase their market share by the
way of mergers and acquisitions."
Shares of Ladbrokes, William Hill and Ireland's Paddy Power
rose on the day on relief that the measures were
not as harsh as expected. However, shares of these companies,
which still have a big presence on the high street, remain down
7 to 20 percent over the past 12 months.
In contrast, the UK travel and leisure index
has risen 19 percent over the same period, the FTSE mid-caps
are up 13 percent, and the blue-chip FTSE 100 is
up 5 percent.
DOUBLE WHAMMY ON TAXATION
The new regulations came on top of higher taxes on the
gambling machines - which account for around 1.5 billion pounds
of annual revenues for British bookmakers - announced in the
budget in March.
That surprise hike will cost the industry around 75 million
pounds from next March. Betting firms are already facing an
additional 300 million pound tax bill as the government closes a
loophole that had allowed them to sidestep taxes by placing
their online operations offshore in places like Gibraltar.
Although many gamblers now bet via tablet or smartphone,
William Hill and Ladbrokes both remain familiar names on the
high street, where each has more than 2,000 shops.
Markit said demand to borrow William Hill's shares made it
the 17th most shorted company on the FTSE 100, and Paddy
Power had the highest proportion of its shares out on loan in
more than three years.
"The turning legislative tide has seen short sellers pile
into UK bookmakers with heavy bricks and mortar presence," said
Simon Colvin, research analyst at Markit.
"Demand to borrow is still strong as the firms face stiff
competition both in physical and online markets and a heavy
criticism of their business practices and increased taxes."
UK bookmakers are still not cheap, however, by historical
standards, reinforcing expectations they have further to fall.
Datastream shows Ladbrokes shares trade at 13.6 times their
one-year forward earnings per share (EPS), against its 10-year
average of 11.6 times.
William Hill is at 12.1 times, against a long-term average
of 11.1 times, while Paddy Power's price-earnings ratio is 18.3,
against a 10-year average of 17.6.
"For Ladbrokes, we continue to see downside risk from the
relative lack of geographic and channel diversification. Lower
cash generation from its retail operations may further impact
its ability to revive its digital business," Nomura analyst
Richard Stuber said.
Thomson Reuters StarMine's 'Smart Estimates', which give
more weight to top-rated analysts, show Ladbrokes' EPS is likely
to fall by 10 percent in 2014 from the previous year and a
further 13 percent in 2015.
(Additional reporting by Keith Weir; Editing by Blaise Robinson
and Will Waterman)