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Hedge funds targeting UK bookies

Friday, May 02 14:43:21

Hedge funds are gambling on profiting from further falls in the share prices of British bookmakers, who face increased taxes on two fronts and curbs on how they run their high street betting shops.

According to Markit data, interest from short sellers in several British betting firms has risen over the past two months, with Ladbrokes shares on loan climbing to more than 6 percent of the total available, from 4.7 percent, while William Hill's shares on loan have risen to 2.6 percent from 0.3 percent.

William Hill is the market leader and part of the FTSE 100 index of leading British stocks, while Ladbrokes is Britain's second-largest bookmaker.

Short sellers at hedge funds borrow a security they expect to fall so they can sell it now, buy back later at a lower price, then pocket the difference after returning the shares to the lender.

Britain this week moved to tighten planning controls on the spread of betting shops and the high-stakes gambling machines that make up a growing part of their business.

Local councils can now refuse applications for new shops on the high street, while cash spend of users on high-stakes games like roulette has been further regulated.

"You can assume that these companies are going to have a tough time as they have got several regulatory headwinds," said Michael Campbell, leisure analyst at Daniel Stewart.

He said the bigger groups, however, were better placed to mitigate the effects by shutting some shops to cut costs.

"It's also an opportunity for the larger businesses, which have got a lot of cash, to increase their market share by the way of mergers and acquisitions."

Shares of Ladbrokes, William Hill and Ireland's Paddy Power rose on the day on relief that the measures were not as harsh as expected. However, shares of these companies, which still have a big presence on the high street, remain down 7 to 20 percent over the past 12 months.

In contrast, the UK travel and leisure index has risen 19 percent over the same period, the FTSE mid-caps are up 13 percent, and the blue-chip FTSE 100 is up 5 percent.

The new regulations came on top of higher taxes on the gambling machines - which account for around 1.5 billion pounds of annual revenues for British bookmakers - announced in the budget in March.

That surprise hike will cost the industry around 75 million pounds from next March. Betting firms are already facing an additional 300 million pound tax bill as the government closes a loophole that had allowed them to sidestep taxes by placing their online operations offshore in places like Gibraltar.

Although many gamblers now bet via tablet or smartphone, William Hill and Ladbrokes both remain familiar names on the high street, where each has more than 2,000 shops.

Markit said demand to borrow William Hill's shares made it the 17th most shorted company on the FTSE 100, and Paddy Power had the highest proportion of its shares out on loan in more than three years.

"The turning legislative tide has seen short sellers pile into UK bookmakers with heavy bricks and mortar presence," said Simon Colvin, research analyst at Markit.

"Demand to borrow is still strong as the firms face stiff competition both in physical and online markets and a heavy criticism of their business practices and increased taxes."

UK bookmakers are still not cheap, however, by historical standards, reinforcing expectations they have further to fall. Datastream shows Ladbrokes shares trade at 13.6 times their one-year forward earnings per share (EPS), against its 10-year average of 11.6 times.

William Hill is at 12.1 times, against a long-term average of 11.1 times, while Paddy Power's price-earnings ratio is 18.3, against a 10-year average of 17.6.

"For Ladbrokes, we continue to see downside risk from the relative lack of geographic and channel diversification. Lower cash generation from its retail operations may further impact its ability to revive its digital business," Nomura analyst Richard Stuber said. (Reuters)