Mixed shares/cash/CVR offer for Ladbrokes Coral (LCL)
Posted: December 22nd, 2017, 1:59 pm
Note to moderators and anyone else concerned about on-topicness: Ladbrokes Coral is not currently a HYP share, but has been in the past (in its previous guises as Hilton Group and then Ladbrokes). Indeed, it is definitely in some existing HYPs, namely HYP1 and CHYP1, and so quite possibly others as well.
GVC has made a takeover offer for Ladbrokes Coral, in scheme-of-arrangement form:
https://www.investegate.co.uk/ladbrokes ... 00041823A/
It is quite a complex deal, offering 32.7p cash, 0.141 GVC shares and a Contingent Value Right ("CVR") for each LCL share. The last basically becomes a loan note worth some unknown amount between 0p and 42.8p when that amount is determined, plus interest at 7% for the first 6 months and 1 day, then 9% until it matures (which it does on the later of 18 months after the effective date of the scheme of arrangement, and 6 months and 1 day after the loan notes are issued). The amount that the loan notes will be worth will depend on the result of the government's review of fixed-odds betting terminals, in particular on whatever measures the government enacts limiting the maximum allowed stakes on them, how quickly they're allowed to complete a game, and how many such terminals an operator may operate. If the government doesn't enact any such measures, they will be worth 35p. Otherwise, there's nine pages (on a fair-sized desktop monitor) of text about just how the CVRs work in section 4 of the announcement giving details for anyone who can be bothered to work them out.
A few extra details I have picked up on a skim:
* Unsurprisingly, if the loan notes are determined to be worth 0p, they will not be issued and the CVRs will expire worthless.
* GVC say they'll consider setting up an over-the-counter trading facility or a listing for the CVRs and/or the loan notes they later become, but don't promise to do so. Even if they do so, if it's an over-the-counter facility I rather doubt that many cheap online brokers will actually allow them to be traded, and possibly even to be held - I've certainly had a shareholding rematerialised as a certificate and posted to me when it was delisted because the broker could no longer hold it in electronic form on CREST.
* There are also possible issues about whether the CVRs and/or loan notes will be holdable in ISAs, which are not addressed in the announcement. There will however be a Scheme Document issued in due course, which I would expect to fill in various missing details - in particular, the only things stated about the timetable are that the Scheme Document is expected (but not promised) to be published in February and that it will contain the rest of the expected timetable.
* There will be a mix-and-match option between the cash component and the GVC shares component of the scheme: shareholders will be able to ask for more cash or for more GVC shares, and such requests will be met to the extent that they can be matched to requests in the opposite direction. There won't however be any mix-and-match option between the CVR component and the cash/share components, so LCL shareholders will get no choice about receiving a CVR per LCL share. And of course, the "to the extent" part of the above means that even without the CVR component, there would be no way that an LCL shareholder would be able to guarantee getting all cash or all GVC shares from the takeover, which are of course the best two outcomes from the point of view of not ending up with excessively small holdings / poor-cost-efficiency purchases.
Overall, the scheme is stated to be worth between about 164.4p and 207.2p per LCL share, depending on what the CVRs turn out to be worth, and based on a GVC share price of 934p. The GVC share price is currently 909.5p, so both ends of that range can currently be reduced by 0.141 * (934p - 909.5p) = about 3.5p, making the current range about 160.9p to 203.7p. The LCL share price is currently 176.5p, suggesting that the market is currently assessing the potential CVR value at about 176.5p - 160.9p = 15.6p, or maybe a bit higher to allow for the fact that it's not yet 100% certain that the deal will go through and so what is being valued by the market is a high-but-not-100% chance of getting a CVR, not a full CVR.
All of this will of course produce decisions for pyad to make about HYP1 and for me to make about CHYP1. Speaking for my own decision only, my immediate inclination is that this is one of the rare occasions when CHYP1 should sell. It is well-established that although both HYP1 and CHYP1 are non-tinkering HYPs, that's only in the sense that they don't sell for investment reasons, such as shares having ceased to qualify as HYP shares or holdings having become overweight. They do occasionally sell for 'admin' reasons, i.e. cases where if corporate actions are left to produce their default outcome, the result and/or the process will be unnecessarily awkward for the portfolio owner, and where a judicious sale can avoid that awkwardness. Previous occasions on which they have done so include (not necessarily a complete list):
* United Utilities' 2-stage rights issue in 2003, when HYP1 and CHYP1 were the same portfolio, to get it dealt with quickly and simply. (https://web.archive.org/web/20170213190 ... sort=whole)
* Anglo American's demerger of Mondi in 2007, to avoid two tiny holdings, one of them foreign. This applies to both HYP1 and CHYP1, which were the same portfolio at the time - they first diverged (by a small amount) as a result of unintentionally-different decisions about reinvesting the proceeds. (https://web.archive.org/web/20170213052 ... e#10613470)
* Banco Santander's takeover of Alliance & Leicester in 2008, to avoid the resulting foreign holding of Banco Santander shares. This applies to both HYP1 and CHYP1, which diverged significantly in 2008 as a result of this and two other takeovers and of pyad's decision what to do with them not being available due to his absence from TMF. (https://web.archive.org/web/20170212103 ... sort=whole for CHYP1, which was called HYP1 at the time on the TMF board. Only clear for the actual HYP1 from the fact that it did not contain Banco Santander when pyad posted about HYP1 again after his return.)
* RSA's rights issue in 2014, in which HYP1 (but not CHYP1) sold the rights rather than let them lapse. (Reasons described in https://web.archive.org/web/20170213113 ... sort=whole)
* Vodafone's complex deal with Verizon Communications in 2014, which only affected CHYP1 because it owned Vodafone and HYP1 didn't, to avoid a foreign holding. (https://web.archive.org/web/20161210103 ... 65825.aspx and https://web.archive.org/web/20161210103 ... sort=whole)
In this case of GVC taking over Ladbrokes Coral, there are three 'admin' reasons why I might decide to sell:
* The deal is definitely going to be awkward administratively, due to the CVRs and likely subsequent loan notes. Doing nothing when the takeover occurs will result in a moderately small cash payment then and (assuming the loan note value doesn't come out as 0p) another one later, each of which will require reinvestment.
* The CVRs and/or the likely subsequent loan notes might well create plausibility problems with the idea that CHYP1 is held in an ISA and therefore unaffected by tax issues.
* GVC is incorporated and registered in the Isle of Man, and so GVC shares probably pay dividends under the Isle of Man tax regime rather than the UK one. Not definitely, as there are cases of foreign-registered companies paying dividends under the UK tax regime (RDSB is the one most familiar to HYPers), but if so, that's a definite no-no in my demo portfolios and therefore in CHYP1. (My reasons for that are personal and do not depend on how benign the foreign tax regime is. They are also basically not open to debate - obviously I cannot prevent people debating them, but I can and will ignore any such debate.)
Anyway, there's no hurry to make the decision, and in keeping with CHYP1's basically-non-tinkering nature, I will wait until this takeover becomes rather more certain to go through before deciding whether to sell. But it does look likely based on the above that if it comes to that point, I will decide to sell.
Gengulphus
GVC has made a takeover offer for Ladbrokes Coral, in scheme-of-arrangement form:
https://www.investegate.co.uk/ladbrokes ... 00041823A/
It is quite a complex deal, offering 32.7p cash, 0.141 GVC shares and a Contingent Value Right ("CVR") for each LCL share. The last basically becomes a loan note worth some unknown amount between 0p and 42.8p when that amount is determined, plus interest at 7% for the first 6 months and 1 day, then 9% until it matures (which it does on the later of 18 months after the effective date of the scheme of arrangement, and 6 months and 1 day after the loan notes are issued). The amount that the loan notes will be worth will depend on the result of the government's review of fixed-odds betting terminals, in particular on whatever measures the government enacts limiting the maximum allowed stakes on them, how quickly they're allowed to complete a game, and how many such terminals an operator may operate. If the government doesn't enact any such measures, they will be worth 35p. Otherwise, there's nine pages (on a fair-sized desktop monitor) of text about just how the CVRs work in section 4 of the announcement giving details for anyone who can be bothered to work them out.
A few extra details I have picked up on a skim:
* Unsurprisingly, if the loan notes are determined to be worth 0p, they will not be issued and the CVRs will expire worthless.
* GVC say they'll consider setting up an over-the-counter trading facility or a listing for the CVRs and/or the loan notes they later become, but don't promise to do so. Even if they do so, if it's an over-the-counter facility I rather doubt that many cheap online brokers will actually allow them to be traded, and possibly even to be held - I've certainly had a shareholding rematerialised as a certificate and posted to me when it was delisted because the broker could no longer hold it in electronic form on CREST.
* There are also possible issues about whether the CVRs and/or loan notes will be holdable in ISAs, which are not addressed in the announcement. There will however be a Scheme Document issued in due course, which I would expect to fill in various missing details - in particular, the only things stated about the timetable are that the Scheme Document is expected (but not promised) to be published in February and that it will contain the rest of the expected timetable.
* There will be a mix-and-match option between the cash component and the GVC shares component of the scheme: shareholders will be able to ask for more cash or for more GVC shares, and such requests will be met to the extent that they can be matched to requests in the opposite direction. There won't however be any mix-and-match option between the CVR component and the cash/share components, so LCL shareholders will get no choice about receiving a CVR per LCL share. And of course, the "to the extent" part of the above means that even without the CVR component, there would be no way that an LCL shareholder would be able to guarantee getting all cash or all GVC shares from the takeover, which are of course the best two outcomes from the point of view of not ending up with excessively small holdings / poor-cost-efficiency purchases.
Overall, the scheme is stated to be worth between about 164.4p and 207.2p per LCL share, depending on what the CVRs turn out to be worth, and based on a GVC share price of 934p. The GVC share price is currently 909.5p, so both ends of that range can currently be reduced by 0.141 * (934p - 909.5p) = about 3.5p, making the current range about 160.9p to 203.7p. The LCL share price is currently 176.5p, suggesting that the market is currently assessing the potential CVR value at about 176.5p - 160.9p = 15.6p, or maybe a bit higher to allow for the fact that it's not yet 100% certain that the deal will go through and so what is being valued by the market is a high-but-not-100% chance of getting a CVR, not a full CVR.
All of this will of course produce decisions for pyad to make about HYP1 and for me to make about CHYP1. Speaking for my own decision only, my immediate inclination is that this is one of the rare occasions when CHYP1 should sell. It is well-established that although both HYP1 and CHYP1 are non-tinkering HYPs, that's only in the sense that they don't sell for investment reasons, such as shares having ceased to qualify as HYP shares or holdings having become overweight. They do occasionally sell for 'admin' reasons, i.e. cases where if corporate actions are left to produce their default outcome, the result and/or the process will be unnecessarily awkward for the portfolio owner, and where a judicious sale can avoid that awkwardness. Previous occasions on which they have done so include (not necessarily a complete list):
* United Utilities' 2-stage rights issue in 2003, when HYP1 and CHYP1 were the same portfolio, to get it dealt with quickly and simply. (https://web.archive.org/web/20170213190 ... sort=whole)
* Anglo American's demerger of Mondi in 2007, to avoid two tiny holdings, one of them foreign. This applies to both HYP1 and CHYP1, which were the same portfolio at the time - they first diverged (by a small amount) as a result of unintentionally-different decisions about reinvesting the proceeds. (https://web.archive.org/web/20170213052 ... e#10613470)
* Banco Santander's takeover of Alliance & Leicester in 2008, to avoid the resulting foreign holding of Banco Santander shares. This applies to both HYP1 and CHYP1, which diverged significantly in 2008 as a result of this and two other takeovers and of pyad's decision what to do with them not being available due to his absence from TMF. (https://web.archive.org/web/20170212103 ... sort=whole for CHYP1, which was called HYP1 at the time on the TMF board. Only clear for the actual HYP1 from the fact that it did not contain Banco Santander when pyad posted about HYP1 again after his return.)
* RSA's rights issue in 2014, in which HYP1 (but not CHYP1) sold the rights rather than let them lapse. (Reasons described in https://web.archive.org/web/20170213113 ... sort=whole)
* Vodafone's complex deal with Verizon Communications in 2014, which only affected CHYP1 because it owned Vodafone and HYP1 didn't, to avoid a foreign holding. (https://web.archive.org/web/20161210103 ... 65825.aspx and https://web.archive.org/web/20161210103 ... sort=whole)
In this case of GVC taking over Ladbrokes Coral, there are three 'admin' reasons why I might decide to sell:
* The deal is definitely going to be awkward administratively, due to the CVRs and likely subsequent loan notes. Doing nothing when the takeover occurs will result in a moderately small cash payment then and (assuming the loan note value doesn't come out as 0p) another one later, each of which will require reinvestment.
* The CVRs and/or the likely subsequent loan notes might well create plausibility problems with the idea that CHYP1 is held in an ISA and therefore unaffected by tax issues.
* GVC is incorporated and registered in the Isle of Man, and so GVC shares probably pay dividends under the Isle of Man tax regime rather than the UK one. Not definitely, as there are cases of foreign-registered companies paying dividends under the UK tax regime (RDSB is the one most familiar to HYPers), but if so, that's a definite no-no in my demo portfolios and therefore in CHYP1. (My reasons for that are personal and do not depend on how benign the foreign tax regime is. They are also basically not open to debate - obviously I cannot prevent people debating them, but I can and will ignore any such debate.)
Anyway, there's no hurry to make the decision, and in keeping with CHYP1's basically-non-tinkering nature, I will wait until this takeover becomes rather more certain to go through before deciding whether to sell. But it does look likely based on the above that if it comes to that point, I will decide to sell.
Gengulphus