What's Next for Ladbrokes?

After completing the sale of its 416 hotels to its American sister company £3.3 billion (US$5.8 billion), U.K.-based Hilton Group Plc (HG.L) will have no other business properties besides its Ladbrokes betting and gaming division. One of the most prominent gambling businesses in the United Kingdom and Europe, Ladbrokes will be watched with interest by many, especially now as England undergoes a liberalization of its gambling laws.

Hilton's stated plan for the future goes no further than changing its trading name from Hilton Group to Ladbrokes Plc and continuing with business as usual, but amid the consolidation taking place in the U.K. gambling industry and the global interactive gaming industry some observers are speculating that Ladbrokes will soon be somehow involved in a merger or acquisition. There is also great anticipation that the company could opt to begin accepting wagers from gamblers in the United States (now that the American directors of Hilton Hotels Corp. have resigned from the company).

The Sale, the History and the Management Shuffle

The sale of Hilton Group's lodging assets (collectively referred to as Hilton International, or HI) to Hilton Hotels Corp (HHC) for £3.3 billion, which equates to a purchase price of multiple of 11.3 times pro forma 2006 adjusted EBITDA, is expected to be completed during the first quarter of 2006, likely in February.

Led by founder Conrad N. Hilton, HHC possessed the first global hotels business until it spun the international business to shareholders in 1964, retaining only its U.S. properties. The international unit had a number of owners over the years before it was acquired by bookmaker Ladbroke Group Plc in 1987. Ladbroke Group and HHC signed a strategic alliance in 1997 that involved an agreement to share marketing, reservations and loyalty card programs, and in 1999 Ladbroke changed its name to Hilton Group Plc to reflect its growing hotel business.

HHC CEO and Cochairman Stephen F. Bollenbach says the transition represented "the final and logical step in a process that began in 1997 with the signing of our strategic alliance, and is a unique opportunity to once again position HHC as a global lodging industry leader for the first time in more than 40 years."

With only its gambling firm remaining, Hilton Group will rename itself Ladbrokes Plc when the transaction is complete. A changing of the board of directors has already taken place to address the company's new situation. Now that there is no more need for cooperation between the two companies on the hotels front, Bollenbach has resigned from the board of Hilton Group, while David Michels, CEO of Hilton Group, has resigned from the board of HHC. John O'Reilly, head of e-gaming at Ladbrokes, will join his company's board of directors after the completion of the sale, as will Alan Ross, the company's head of European retail.

Hilton Group CEO Michels is headed to the United States to accept a three-year consultancy job with HHC that will pay him close to £9 million ($15.8 million) for the contract period. The head figure for the British gambling group is now Chris Bell, who has been, and will continue to be, CEO of Ladbrokes. Bell has been with the company since 1991. Ian Robinson, who sat as chairman of Hilton Group, will continue to serve as chairman of Ladbrokes, and Rosemary Thorne from the Bradford & Bingley Plc banking group will take over as finance director.

The New Ladbrokes

When the strategic alliance between HHC and Hilton Group was in place, Ladbrokes had absolutely no prospect of accepting wagers from U.S. gamblers. But now that Bollenbach no longer sits on Hilton Group's board--and the company has no other formal ties to America--neither HHC nor Ladbrokes faces a risk if the company were to begin accepting U.S. wagers.

Ladbrokes has been mute on this point, having others matters pertaining to the hotels sale to deal with first, but press reports have been quick to recognize the freedom the split brings to Ladbrokes, especially now that the U.K. government has confirmed that it sees no reason why it should prevent its licensed remote gambling operators from accepting wagers from the United States

Generating even more buzz is speculation that the company could become involved in another transaction in the very near future. It has been widely reported that private equity bidders, including BC Partners, Blackstone and CVC Capital Partners, are attempting to woo Ladbrokes for a sale price of about £4 billion (US$7 billion).

Bell has shrugged off the speculation. "You'll need a very big war chest before we show any interest," he said.

He also stated, "This will be a company worth over £4 billion, and my job is to make it even stronger, so if somebody wants to own us, they would have to put up a very big pot of gold."

Those words may be true, but the company could also be playing hard to get.

The private equity partners have good reason to vigorously court Ladbrokes. Britain's third largest bookmaker, Coral, is understood to have been one of the most lucrative private equity investments in recent years before it was sold by Candover, Cinven and Permira to Gala for £2.18 billion (US$3.8 billion) in October.

The landscape of the British gambling industry is also changing in such a way that an opportunity to align with Ladbrokes would be a tremendous opportunity for any firm with the means to achieve it. Competition is heating up to develop the largest presence in a country where deregulation is becoming a reality. The recent acquisition of Coral by Gala is a perfect example of what is happening as a result. Primarily a bingo club and casino operator before the acquisition, Gala now also controls 1,267 betting shops and strong Internet operations. As Gala CEO Neil Goulden put it, "Nobody rivals us now because nobody has an integrated company with licensed betting offices, casinos, bingo and online gaming all in one group."

Another massive juggernaut company was nearly created just three weeks ago, but negotiations between Britain's largest bookmaker William Hill and gaming firm Rank for an all-share merger failed; William Hill's board rejected the deal because the companies have different ratings on the London Stock Exchange (with Rank's shared viewed as slightly overvalued in a one-for-one swap). If it had gone through, the deal would have created Britain's largest gambling group, composed of William Hill's 2,000 betting shops and strong online operations and Rank's 36 Grosnover casinos, 120 Mecca bingo halls, Blue Square online gaming brand and 100 Hard Rock Cafés in 38 countries.

On a side note, Rank has since unloaded its film unit, making it an even more desirable target, and William Hill only recently surpassed Ladbrokes as the largest betting shop operator in the United Kingdom by purchasing the betting division of Stanley Leisure in May 2004.

It wouldn't necessarily have to be a British firm that would somehow manage to align itself with Ladbrokes either. Consolidation has also begun occurring in the global online gambling industry, and much more of it is expected in the next few years. Rather than merge or be acquired by a British rival, it might be even more advantageous to Ladbrokes to purchase an online company that already has an established brand in the United States.

At any rate, Bell is naturally reluctant to divulge the specifics of any plans for his company. One of the company's first actions will be deciding how much of the £3.3 million it will receive for the hotels to return to investors. It will also have to pay down a pension fund deficit.

Shares in Hilton Group have risen by 17 percent to 367p since the company announced in October that it may sell its hotels unit to HHC.