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Ladbrokes plc rockets as merger with Gala Coral Group Limited set to go ahead

The traditional “sin industry” of betting is actually booming in this country. But it’s a crowded market place, with fast growing online companies such as Paddy Power Betfair and GVC jostling for position with the traditional betting shops such as market leader William Hill.

The merger is now likely to go ahead

It’s a little like the supermarket sector in the UK, with a rapid transition to online trading, growing numbers of retail outlets, and a close-fought battle between an increasing number of competitors. In order to preserve profit margins and earnings, this is leading to consolidation in this fast moving industry.

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In the past few months, the second and third most popular betting firms — Ladbrokes (LSE: LAD) and privately-owned Gala Coral Group Limited — have been in advanced talks to join forces. A larger company would mean lower overheads and more funds to spend on the all-important marketing and advertising that drives this sector.

The question with this merger has always been just what the competition authorities would allow. After all, Ladbrokes owns 2,154 shops in the UK, and Gala Coral operates 1,850. Put these two together, and they would very substantially out-muscle William Hill, and would arguably be too powerful a force in the UK bookmaking industry.

So the Competition and Markets Authority (CMA) has had to perform a delicate balancing act. And the news today that it will allow the merger to proceed, as long as 350 to 400 shops are sold, sounds a fair compromise. The merger is likely to be cleared once this transaction takes place.

And the CMA’s logic seems clear: when the market place is as crowded as betting is, it becomes harder to argue that reducing the number of competitors raises monopoly concerns.

And this has been welcomed by investors

Not surprisingly, investors have welcomed this news by pushing Ladbrokes’ share price up more than 10% at the start of trading today. After all, the new company would have a dominant position in this sector.

If we now assess the investing credentials of Ladbrokes, I think it certainly holds appeal. It is moderately priced at a current P/E ratio of 12.60, with a dividend yield of 4.28%. Although the degree of competition in this sector means there won’t be rapid growth, I think that this is worth considering as a dividend investment.

As well as its UK company, Ladbrokes has shops in Ireland, Belgium and Spain, and a growing online betting business. Expanding internationally and through apps and the internet seems to be this company’s most likely route to future riches.

Overall, my top pick in this industry remains the small cap online firm GVC, as this has greater prospects for growth, and is still reasonably priced. But for those who are on the look out for income investments, Ladbrokes could certainly be of interest.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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