Ladbrokes’ shareholders must call for Bell’s head.

In February 2008 the tame and compliant UK  press were falling over themselves to announce the great news that the English billionaire Joe Lewis had taken a stake of 7% in Ladbrokes, worth about £133m.

The Guardian’s Nils Pratley was compelled to write at the time;

“Has Joe Lewis, the British billionaire, built a stake of 7% in Ladbrokes? The company apparently doesn’t know, but the story smells true.  Ladbrokes would appeal to a value hunter. A sizeable chunk of the revenues comes from electronic roulette machines. These properly belong in casinos but the government has agreed they can be operated by high street bookies. For Ladbrokes, it’s risk-free cash.  Lewis may also have noticed that his multi-millionaire friends are gamblers by instinct. Ladbrokes is doing nicely with its volatile, but often lucrative, income from “high rollers”.  Yes, deregulation has produced more high street competition, but the market leader is unlikely to be blown away. Given the weakness in the shares, Lewis would be making a reasonable bet.”

I wrote to Pratley at the time, suggesting that that his comments were careless in the extreme, and based upon no real knowledge of the gambling industry’s structure, its regulatory framework and its future outlook.  Pratley  did not reply.

In the interim period, Joe Lewis and his partners allegedly chalked up a loss of over $1 billion dollars in the collapse of the American investment bank Bear Stearns.

Ladbrokes, meanwhile, recently announced results for the 3 months ended 30 September 2009.  Group net revenue was down 15 per cent.  Gross win margin was significantly lower due to poor horseracing margins and an exceptionally low football margin.   Group operating profit fell 58 per cent to £22.4m.   The company also launched a £275m (€300m) steeply discounted rights issue, that comprised of a one-for-two issue of 300m new shares, priced at 95p, or a 48 per cent discount to its then closing price of 181p

At the time of Lewis’ acquisition of shares in Ladbrokes,  the company was valued at around 1.9bn; this morning, it is valued at 848mn.  This would suggest that Lewis may be sitting on a loss in the company somewhere in the region of 60m.

The Irish investors JP McManus and John Magnier, have also allegedly built up stakes in Ladbrokes in the past, and they too may now be sitting on significant paper losses.

In the wake of the recent release of the company’s results, Ladbrokes’ CEO Chris Bell spoke of the Ladbrokes franchise  as being “a profitable and cash-generative business with strong positions in markets that remain attractive.”

There is no reason, however, why the company’s recent profit warning, alongside the unexpected arrival of a heavily discounted, highly dilutive rights issue, should not trigger a change of management at Ladbrokes.

For those shareholders that have seen the value of their investment in the company decrease significantly  in recent times, the charge sheet against Bell could run as follows;

that he was guilty of swallowing the myth that gambling companies were resilient in the face of an economic downturn;  that he wrongly believed that fixed odds betting terminals would not cannibalise the company’s traditional core business;  that he did nothing to stem the tide as punters deserted the horse racing product; that he failed to appreciate the threat that Betfair poses to his company’s traditional business model; that he failed to exploit the opportunities presented in the newly liberalised betting markets of Italy and Spain; that he has failed to innovate; that he has failed to exploit the value of the Ladbrokes brand, not least in the online sphere, etc, etc …

Moreover, shareholders should demand that the £957,000 bonus that was paid to Bell this year be returned.  They should also question why it was that he was granted a 11.4% salary increase last summer (attributed to “reflect competitive pay levels and the continuing high levels of leadership Mr Bell gives to the business.”).

Meanwhile, in the wake of the recent rights issue, the short sellers have arrived on Ladbrokes’ lawn, with CATAPULT CAPITAL,MILLENNIUM PARTNERS, L.P and Highbridge Capital Management all recently disclosing short positions in the company.

Cross-posted from BettingMarket