Monday, October 10, 2011

Diary: SBT

I had planned initially to write about a growth share. Instead, I came across this little idea that I would like to share. It's amazing just how many ideas one can come up with when you start to look at things. I'm certainly not lacking for quantity. Quality, though, that's a different matter.

SBT - Sporting Bet - Travel and Leisure - £303m/46.8p
In a nutshell: "Sportingbet Plc is engaged in the operation of licensed betting and gaming operations over the Internet." I know, sounds risky with a lot of competition just aching to eat your lunch. There's the whole sporting tax to worry about, juicy returns attracting competition, and issues over legality in the US and some other places. On with some numbers: PER 7.5, ROE 20%, net cash £120m, EV/EBITDA 3.6. Analyst forecast 2012 earnings to be down 10% over 2011, which probably explains why the stock is getting crucified. Analysts reckon 2013 earnings will grow by 20%. Anyway, leaving aside what analysts think, it looks like an interesting magic formula stock if the politicians don't murder the profitability. But wait ... there's more ... and the real reason I'm posting this ...

In June 2011, Ladbrokes, the £1bn veteran betting company, made a preliminary takeover approach for SBT, at 70p, it's third attempt in recent months to strengthen its internet gambling capability (link). An analyst at Evolution suggested 80-90p might be the ultimate price. Now, here's the interesting bit. SBT derives about 20pc of its revenues from Turkey, which was "believed by many in the sector to be an illegal market".

With me so far? Now, Reuters reported yesterday: "Online gaming firm Sportingbet is close to agreeing the sale of its Turkish gambling business to GVC, clearing an obstacle to Ladbrokes' takeover of the company". The article says that Ladrokes has until 17 Oct to "put up and shut up" under new takeover rules. A poster on II notes, though:
The fear is that if the Sportingbet deal goes the same way as 888, Ladbrokes's online strategy would be left looking threadbare. But the chances of a deal happening are increasing and, even if the complexities make the October 17 deadline impossible to meet, there should be no problem in getting an extension from the Takeover Panel, says the Times.
"SirBob" on the LSE board writes:
' if we sell the turkish arm we will have 75% of our business in regulated markets. We must remember he is trying to get the best price for the shareholders and will be trying to say to Lads, we don't NEED your bid .
"Maxwell2" responds:
I agree with SirBob. Originally, Ladbrokes were in the position of complete power, they were demanding the sale of Turkey etc and using it as a price chip. Hoeever, now the GVC deal is done (and it is in reality), they now need to finalise the ladbrokes final price. They will have agreed figures some time ago before they looked at Turkey but it could only have ever been a range. McIvers comments will have been to try and retake some of the bargaining field from Ladbrokes and negotiate the upper end of the price range previously discussed. From my experience in corporate finance this is the kind of statement that companies are advised to make and in reality how such a deal would be done.
 Also worth noting is that SBT published an RNS for its y/e 31.7.11 on 05-Oct-2011. EBITDA was up 11%, where it noted its broad geographic base:
This has been a year of significant progress for the Group both in terms of financial performance and corporate developments. Agreement with the US Department of Justice in September 2010 was followed in August 2011 by the acquisition of Centrebet in Australia and the passing of regulations in two of our largest markets, Greece and Spain. Sportingbet is now well positioned to maximise the growth opportunities available to it as the global online gaming market continues to develop. We already have market leadership in around 50% of the territories in which we operate.

As the online gaming industry matures, governments across the world are recognising the significant potential contribution from online gaming tax revenues as a means to reduce national budget deficits and the need to bring in regulation to protect the consumer and provide a stable trading environment. We welcome these moves and have been exploring ways of increasing the percentage of our revenue derived from regulated markets.
The market seems well-pleased with these results. Anyway, that bit is just gravy. My main point was that I see a significant chance of takeover (rather than just rampant speculation) at a huge premium, on a company that looks good on valuation terms and returns on capital, with the potential for growth.

I have taken a small position in SBT, as I very much want to expore "special situations". I am very new to this arena, but I'm noting that there could be some good opportunities for enterprising investors in what I choose to call "second-chance takeovers" (DLAR - De La Rue - was another such possible example that I mentioned awhile ago), and I'm increasingly believing that there's also opportunities in "placings by proxy" and loathsome rights issues. More of that tomorrow, I hope, where I want to expand upon my thinking about these types of situations.

Wish me luck!

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