February 27, 2014 / 2:50 PM / in 5 years

Fitch: Ladbrokes Most Exposed to Gambling Machine Restrictions

(The following statement was released by the rating agency) LONDON, February 27 (Fitch) Ladbrokes' latest results show that it is the most exposed major UK bookmaker to the risk that the government will tighten regulations on gambling machines in betting shops, Fitch Ratings says. The group's limited online presence and reliance on UK retail operations means it could face a material drop in earnings if new regulations were implemented. Nevertheless, the widespread introduction of the machines means that all operators would suffer. Ladbrokes' results show that 50% of its UK retail net revenue now comes from these machines, known as fixed-odds betting terminals (FOBTs). The proportion is similar for other operators. We believe the risk of tougher regulation, such as a reduction of the current GBP100 maximum bet, has increased in the last few months as the Labour Party has stepped up its criticism of FOBTs and the government has called on the industry to do more to protect customers. Ladbrokes has a 25% market share, with around 9,000 FOBTs across the UK. This puts it second behind William Hill, which has a 29% market share. But Ladbrokes' online operations are much smaller than those of William Hill and operating profit from its UK betting shops represents over 90% of its total operating profit, compared with 68% for William Hill. We put Ladbrokes' 'BB+' rating on Negative Outlook in October 2013 because of poor UK trading and the risks associated with its attempts to reinvigorate its online betting platform. The company has very limited headroom against our leverage guidelines; therefore tighter regulation could lead to a downgrade if there were no significant restructuring or cost-cutting measures. Such measures could include further store closures on top of the 50 planned over the next two years. A significant increase in closure rates would be possible, as we estimate that Ladbrokes has at least 150 leases coming up for renewal every year. Ladbrokes' overall 2013 results were weak across its online, UK and European operations, and leverage is likely to fall more slowly than we previously expected due to limited positive free cash flow generation. We expect leverage to drop to around 3.0x by 2015, which is at the top end of our expectations for a 'BB+' IDR. Contact: Jean-Pierre Husband Director Corporates +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Pablo Mazzini Senior Director Corporates +44 20 3530 1021 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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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