Barclays begins coverage of GVC Holdings with positive rating

GVC Holdings' takeover of Ladbrokes Coral should bring greater scale and geographic diversity as well as boosting earnings and cash growth, said analysts at Barclays as they initiated coverage on the online gaming group on Tuesday.

These three reasons make the deal attractive and, on a proforma post-deal basis, GVC's shares look "cheap" on a price/earnings ratio that would fall from 9-11 in 2020 to around 8-9.5 in 2021 "when all cost synergies should have been delivered".

However, should the deal not complete, as it stands GVC looks "relatively expensive" and the share would likely tumble.

On Barclays confidence in the deal, which was announced late last month, shares in the owner of Foxy Bingo and Partypoker were given an initial 'overweight' rating and a 1,066p target price.

The risks of a large merger are tempered as both sides of the management team have strong track records of integrating complicated businesses and of delivering even better cost synergies than expected.

Greater scale is a "key attribute" the gaming sector, the bank's analysts said, while the merger will bring geographic diversity that will "guard against" higher taxes in mature markets.

Furthermore, the merger should deliver high growth, buoyed by revenue but mainly by cost synergies.

Analysts forecast a compound annual growth rate for earnings per share from 2018 to 2021 of circa 15-17%, strong free cash flow by 2020 of roughly £509-635m, and with "an attractive EBITDA" mix of online sales representing around three quarters and retail the rest by 2020.

Other risks identified include the tax headwinds facing Ladbrokes' Australian business, that Ladbrokes.com is currently losing UK market share, that this is the biggest deal GVC will have taken on, and that there are regulatory risks in key GVC markets such as Germany.