October 24, 2013 / 2:56 PM / in 4 years

Fitch Revises Ladbrokes' Outlook to Negative; Affirms 'BB+'

(The following statement was released by the rating agency) LONDON, October 24 (Fitch) Fitch Ratings has changed Ladbrokes Plc's (Ladbrokes) Outlook to Negative from Stable. Its ratings have been affirmed at Long-term Issuer Default (IDR) 'BB+, Short-term IDR 'B' and senior unsecured 'BB+'. The change of Outlook reflects a contraction of rating headroom at the current 'BB+' level and heightened risks that trading weaknesses could affect Ladbrokes' cash flow generation and leverage. While we expect investments to turn around the online business over the medium term, the exercise is proving more costly than expected. Also Ladbrokes is increasingly slow at closing its gap with competitors. Online exceptional charges and lower online and UK retail profits will likely cause negative cash flow and higher leverage than levels consistent with the 'BB+' rating for 2013 and, possibly, 2014. KEY RATING DRIVERS Weaker UK Retail H113 saw a 19.8% reduction in UK retail operating profit. UK betting has been subject to adverse race results and race cancellations in H113, as well as to a fast pace of innovations from competitors. Content costs from providers such as Turf TV have also risen during the year. While UK machine gross win grew 3.2% in H113, this was due to a greater number of machines. Gross win per shop per week was down 1% during the period, and machines profits which have, in recent years, compensated the secular decline of horse betting, are now stagnating. These are structural changes that are capping industry participants' ratings at a low investment grade level, and have been factored into Ladbrokes' 'BB+' rating. Digital Business Disappointing The online gaming business's operating performance has been disappointing, particularly when compared with main competitor William Hill Plc. Ladbrokes is near completion of a re-launch of its online unit but has been faced with execution challenges such as adoption lag. This has led management to cut divisional profit guidance for 2013. Its online gaming offer and customer relationship management system should start benefiting in 2014 from a new product and marketing services agreement with Playtech - a gaming software, customer relationship management, marketing and services specialist - but larger competitors continue to gain ground in this innovation-led sector. New UK Gaming Tax In the UK a change from VAT to machine games duty (MGD) has seen an increase in tax incurred on machines in stores in H113. Offsetting this increase in tax, Fitch expects new store openings (73 net openings in H113) and a more effective liability management system should deliver higher operating margins for the UK operations. In addition a likely new gaming tax in 2014 for online gaming should, following some temporary disruption, ensure a fairer tax environment for industry players such as Ladbrokes as opposed to smaller competitors based in offshore tax locations. Leverage to Reduce Slowly Fitch predicts an increase in leverage to up to 3.5x (on a funds from operations (FFO) net adjusted leverage basis) for FY13, before falling to 2.9x-3.1x by 2015 at the latest on renewed free cash flow (FCF) generation. This is provided that no significant debt-funded acquisition takes place. Fitch considers 3.0x as the maximum leverage compatible with the 'BB+' rating given the current degree of business risks. Possible M&A Opportunities created by a liberalising European gaming industry and the scope for the development of online gaming make further M&A possible. However, Ladbrokes has been cautious towards M&A transactions entailing legal risks. Lower Forecasts Fitch has revised its projections to factor in weaker UK retail profits, slower growth from gaming machines and the 2013 exceptional charges. Fitch projects that FCF in 2013 will be negative, but could improve in 2014 if the online unit starts to see stronger performance. RATING SENSITIVITIES Positive: Future developments that could lead to the Outlook being revised to Stable include: -Strengthened operations with an established competitive profile in online gaming and a stabilised UK retail business. -FFO adjusted net leverage falling to 3.0x or below Negative: Future developments that could lead to negative rating action include: -FCF remaining in the low single digits as a % of sales -FFO adjusted net leverage staying persistently higher than 3.0x, due to poor trading at any given time, or due to M&A for over 12-18 months. Contact: Principal Analyst Jean-Pierre Husband Director +44 20 3530 1155 Fitch Ratings Limited 30 North Colonnade London E14 5GN Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia SpA V.lo Santa Maria alla Porta, 1 20123 Milan Committee Chair 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. Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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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