UK: BETTER GOING AT LADBROKES?

UK: BETTER GOING AT LADBROKES? - The troubled Ladbroke Group has reached a crossroads: can a new management approach overturn the odds that have been stacked against it?

by Ken Banta.
Last Updated: 31 Aug 2010

The troubled Ladbroke Group has reached a crossroads: can a new management approach overturn the odds that have been stacked against it?

For some time now, buying shares in the controversial Ladbroke Group has been a gamble that even daring punters have thought twice about taking. And lately, the odds against the betting-based conglomerate might seem to have grown even longer than ever.

After years of indifferent-to-poor results, Ladbroke plunged a dramatic £229.8 million into the red in 1994. Then, just as the company was struggling back into the black this year, it suffered a body-blow from sharply intensifying competition from the National Lottery. That knocked an estimated £10-£11 million hole in its core betting operation profits in the first six months of the year alone, and threatens the very future of that business. Poor racing conditions and an unexpected drop in credit betting operations produced further losses, and in August the company announced more than 300 redundancies.

Meanwhile, less than 18 months after appointing ex-American Express executive Tommaso Zanzotto to turn its Hilton International hotel subsidiary into the new money-spinner for the future, Ladbroke disclosed that Zanzotto was leaving the company 'for personal reasons', and that it would be replacing him with an executive from Allied Domecq unknown in the hotel or leisure industries.

All the more surprising then, that many industry experts who were among Ladbroke's most vocal critics in the past are beginning to sound cautiously cheerful about its prospects. Without minimising the size of Ladbroke's remaining problems, or the hurdles it will face in overcoming them, they are beginning to see signs that the company is at last getting the fundamentals right. Chief among these is a tough new management approach that is refining an incompatible grab-bag of businesses which had ranged from retailing to property speculation, into a focused hotels, gaming and betting enterprise, strategically positioned for high-revenue growth.

'Ladbroke is at a crossroads now,' says NatWest Securities leisure industry analyst Mark Finnie. 'It has taken some tough decisions and at last there is a strategic logic running through its business. This next year will see how that translates into bottom line results.' Driving Ladbroke's bid to return to investment 'buy' lists is a figure whom many dismissed as an empty suit when he was appointed chief executive in January 1994. Peter George, 51, is an unassuming Ladbroke career man who climbed up the corporate ladder in the shadow of the legendary Cyril Stein, who over 37 years built Ladbroke from a small and fusty credit betting house into a £2 billion international empire. By the end of 1993, however, the shine was long off Ladbroke's constellation of businesses as debt mounted and losses spread, symbolised by the gigantic white elephant of Texas Homecare, Stein's rash and costly foray into DIY.

With investors baying for his blood, Stein finally stepped aside on 1 January of last year. But the markets were dismayed to find that instead of recruiting a respected outsider to put Ladbroke back into racing form, Stein installed George instead. As one Ladbroke executive says, 'At the time, it looked like it was "out with the old, in with the old", and even people inside the company were sceptical that a Stein protege would have the guts or the vision to do the ground-up overhaul that was needed.' George's first moves as CEO quickly suggested that there might be more steel in his lanky 6ft 5in frame than most observers had suspected. Within months of his ascension, George had slashed the dividend by nearly 50% - the first such cut in Ladbroke's history - and issued the company's first-ever set of 'kitchen-sink' public accounts in a display of corporate glasnost that broke with the obsessive secrecy that had reigned under Stein.

Working closely with newly-appointed chairman John Jackson, a respected business leader who is chairman of six other publicly quoted companies including Celltech, George began an executive house-cleaning that has largely re-shaped the board and injected more than 60 new senior executives into key positions throughout the company. George also set longer-term strategies to hack back Ladbroke's bloated and incoherent business portfolio to a compact core - and is busy implementing them.

Since taking control he has sliced the company's property portfolio by more than half, to £350 million from £800 million at the start of last year, and aims to get rid of most of the rest 'as fast as we can in an orderly way that gets a sensible price', according to corporate affairs director Stephen Devaney. And in what was widely regarded as a major coup, George negotiated the sale of the loss-making Texas chain to Sainsbury's in February at a premium price of £290 million; so premium that Sainsbury's is now trying to claw back some £20 million, claiming it was misled into overpaying. The sell-offs are a major step in stripping Ladbroke back to core businesses, while also helping to reduce a debt mountain of £1.15 billion. Indeed, much of what has looked like yet more bad news from Ladbroke over the past year-and-a-half has in fact been essential corporate first aid internally, while also helping to restore credibility to Ladbroke's battered reputation externally. The 1994 losses, for example, reflected a prudent decision to make provisions against Texas, and even the spate of redundancies, while painful, were read by many industry-watchers as reflecting a new corporate realism.

It all marks what may well be remembered as a sea-change in the corporate history of Ladbroke. Under Stein, the operation had been a kind of corporate roller-coaster, climbing astoundingly high only to fall disgracefully low. When the Stein family bought Ladbroke in 1956 for £250,000, its clerks still recorded the bets of the often aristocratic clients with feather pens. Over the next 20 years, Stein steered the firm through spectacular growth into the UK's largest chain of betting shops and a boggling assortment of investments bought on the back of betting profits, including bingo halls, retail chains, property and hotels. In 1967 Stein floated the company for £2 million. Along the way, Stein's reputation burgeoned as a street-smart operator who ran his growing empire with autocratic intuition, driving his frantic executives almost as hard as he drove himself.

Correctly sensing a major new opportunity to mint money, in the 1970s Stein took the fateful decision to buy into casinos. In those heady days, Ladbroke's swank clubs in Mayfair became synonymous with extravagance, packed with oil-rich Arabs and any other high-rollers willing and able to wager tens or hundreds of thousands of pounds a night on the green baize tables. But as the easy profits rolled in, greed and hubris began to get the upper hand in Ladbroke's executive offices. In 1977 Ladbroke launched a clever, but flatly illegal, scheme to lure high-stakes gamblers from rival clubs, replete with calls and late-night visits to prospective punters by attractive 'hostesses', cash commissions for introductions to big-time losers, limousines, and other lavish inducements.

In 1979 the ceiling fell in on Ladbroke's party. A police investigation and court proceedings led to the verdict that Ladbroke had been guilty of 'disgraceful' conduct and was 'not fit and proper' to run casinos. Although Stein insisted that he had no knowledge or involvement in the scheme, both he and his company were humiliated and disgraced. Forced to sell the London and provincial casinos, Ladbroke saw 40% of its profits disappear overnight. As the scandal reverberated through the City, Ladbroke's shares crashed. Analysts speculated that Stein would be forced out, and Ladbroke scooped up in a takeover.

They were forgetting Stein's formidable survival skills. He clung on as chairman, and by the 1980s was powering Ladbroke back into high growth and profits. He masterminded a string of acquisitions including cable television, the ill-fated Texas chain and, for £645 million in 1987, Hilton International, which in a single stroke made Ladbroke a serious global player. However, the Thatcher boom years were masking underlying weaknesses and over-extension in several Ladbroke holdings, while many in the investment community had never fully forgotten or forgiven the casinos scandal. The recession of the early 1990s sent Ladbroke into a tailspin, and ignited a new groundswell of opposition by institutional shareholders to Stein which this time he could not dodge. Stein's exit, though late, has been as complete as those opponents could wish. Although he draws a £160,000 annual 'consultant' fee, Ladbroke insiders say he is completely divorced from company management.

As a third-generation bookmaker, perhaps one of the few personality traits George shares with Stein is a love of the betting business. After a brief flirtation with a career as an airline pilot - which was scotched due to his excessive height - George dived into odds-making, initially with the family firm before joining Ladbroke in 1963. George never looked back, working his way up through head racecourse representative to managing director of the racing division in 1976, and a seat on the main board in 1980 - just months after the casino fiasco.

Devoted to his work, George is almost scarily devoid of outside interests, admitting that even his marriage has sometimes taken a back seat to his job. As he said in a newspaper interview shortly after becoming CEO, 'If you opened up my heart it would probably have Ladbroke carved on it.' On the job, George projects an open, affable and unflustered personality, which is echoed in a management style at Ladbroke's plush central London HQ that is far removed from Stein's autocratic ways. Says one colleague, 'George believes in putting together a band of strong executives and getting a consensus on the overall strategy, then letting them get on with running it. There's a new and positive atmosphere in the corridors now.' Not surprisingly, George has made a priority of repairing bridges with the City. In meetings with analysts, he has impressed many of them with not only his openness, but also his managerial grip. 'You just look at what has changed at Ladbroke since he took over and it is clear George is setting a strong new course,' says leisure and hotels analyst Paul Slattery of Kleinwort Benson Securities, 'and it's our view that it will allow Ladbroke to become a powerhouse in the leisure industry.' The immediate task to hand is revitalising Ladbroke's bread-and-butter betting business in the UK in the face of the lottery challenge, particularly the popular 'scratch cards'. George gave it a major injection of new blood last year by hiring Mike Smith, a highly respected betting-industry executive who made his name at arch-rival turf accountants William Hill. Smith now runs gaming as well as betting for Ladbroke from a seat on the main board.

Having lowered profit expectations and imposed job cuts, Ladbroke may already be over the worst. But for the betting side to return to even modest growth, according to Trevor Ward of BDO Hospitality Consulting, 'Ladbroke desperately needs changes in regulation, and it must catch up with changing consumer tastes'. Intensive lobbying has already helped level the playing field with newly relaxed rules which allow open shop-fronts, the use of the streetside windows for marketing, and serving of food and non-alcoholic beverages, while the Vernon's Pools subsidiary may now benefit from the lifting of a ban on television advertising by the pools companies. Along with other firms in the betting sector, Ladbroke is now pressing for a reduction in steep duties on bets which it says puts them at a major disadvantage against the Lottery. To appeal to younger and more up-market punters, Ladbroke is investing heavily in high-tech interiors for its 1,200 shops, and expects soon to be permitted to instal slot machines.

Betting, however, is destined to play a dwindling role in Ladbroke's overall income stream if the company's new strategies pay off as planned. In a high-profile display of its fresh ambitions, last September Ladbroke bought its way back into the UK casino business, 15 years after leaving it in disgrace. For £50 million it acquired three London casinos from the City Clubs leisure group, including the exclusive Maxims, housed in a Grade II listed building and catering for the same kind of high-spending jet set that brought massive profits to Ladbroke in the 1970s.

The casinos, for which Ladbroke had its Certificate of Consent restored by the Gaming Board at the end of June, were the first in a planned series of further investments in gaming in the UK. Ladbroke also aims to break into the booming US gaming market, where in the spring the group's gaming arm took out an option for a site for a riverboat casino outside Pittsburgh. US riverboat gambling offers Ladbroke potentially enormous opportunities: profits of £30 million and more per year on a single boat are not uncommon. Meanwhile, Ladbroke is also lobbying hard in the UK for relaxed casino rules, including an end to the requirement that punters register 48 hours in advance of play, and permission to promote casino gambling through in-flight magazines and hotel display advertising. Says one Ladbroke executive bluntly: 'We need to end the stupidities that still shackle this sector.' The make-or-break strategic issue for Ladbroke, however, is the future of its Hilton operations.

Profits from hotels - essentially, 160 Hilton International properties or management contracts held by Ladbroke - was £65.8 million for the first half of this year. That's up 35% on the same period in 1994, and represents nearly 60% of the group's total profit. But hotels are a notoriously cyclical industry, and in the most important single market of all - the US - Ladbroke has so far failed to achieve a significant presence.

In order to broaden its geographical reach and help iron out the impact of local boom or bust hotel trends, in the past year Ladbroke embarked on an ambitious expansion, including new management contracts on a total of 11 existing and planned hotels in India with Bharat Hotel group, a new hotel in South Africa, a new Hilton Resort hotel in Hurghada, Egypt, and the luxury Atrium hotel in Prague. Ladbroke is also seeking to exit from hotel ownership and focus increasingly on management contracts, which it sees as more profitable and less risky. 'Property has not been kind to Ladbroke,' says one executive. 'Our Hilton competence is in management, and we need to play to our strength.' Whether Ladbroke can, and will, extend that competence to the US is the multi-billion pound question. Conrad Hilton's decision in 1964 to spin off the international properties created two separately owned and operated Hilton brands, by far the larger of which is the US system, valued at £2.3 billion. But now Hilton Corporation, owner of the US operation, has signalled that its brand is up for sale. Ladbroke is positioned as practically the only sensible investor, with potential to develop presumably untapped synergies by uniting the US and international brands and integrating marketing, management, reservations and incentive programmes.

For his part, George has indicated publicly that a deal is the next item on his agenda, saying that 'it (Hilton US) is a mirror image of ourselves', and he has set up a top-level internal team dedicated to the project. It is the quality of that deal that will largely determine Ladbroke's medium to long-term prospects. A complete takeover by Ladbroke is all but impossible given the size of Hilton Corporation and Ladbroke's debt burden, and would be regarded as a disastrous over-extension by analysts and institutional investors. Instead what is widely expected is a deal which will give Ladbroke some form of management control over the US chain as well as the right to exploit the Hilton brand as an integrated system in all markets. Says Alan Hopper, leisure industry management consultant at Pannell Kerr Foster, 'Everything hinges on what they get and how much they pay for it.' The departure of Zanzotto, which will take place next year, and the announcement in September of his replacement by David Jarvis, 48, has rattled the markets and raised doubts about the ability to realise Hilton's potential. Jarvis has 23 years' experience in the drinks sector with Allied Domeque, and most recently as CEO of Hiram Walker, but he has never been in hotels except as a guest. 'The fact that Jarvis is not a hotelier will disappoint a lot of observers,' says NatWest's Finnie. 'The jury will be out until we can see how he delivers.' According to Ladbroke insiders, Zanzotto is leaving under his own steam, mainly because he expected to have full autonomy in running Hilton. He was unhappily surprised in the past few months to find George, Jackson and other senior executives actively engaged in strategy and decision-making for the division. Embarrassing though this executive game of musical chairs is for George as he tries to re-establish investor confidence, some hotel industry experts feel that it is more a PR blow than a management crisis.

They point out that there is considerable depth and strength in Hilton International's top management, bolstered by recent hires carried out in George's reign. Among them: David Wilson, a former senior partner at Ernst & Young who now directs finance, development and real estate operations; Paul Steele, who brings to the somewhat sleepy world of hotel marketing some state-of-the-art selling skills honed over years with Pepsi Cola International; and David Amos, a human resources expert hired from Courtaulds, who will be responsible for burnishing Hilton's service delivery.

Perhaps a more serious question is whether the seeming synergies between Hilton International and the US operation are as great as is imagined. Despite recent efforts to improve the quality of the franchise, the US chain is essentially mid-market, while Hilton International is a premium product. There will be formidable problems in combining reservations networks and other systems. And while Ladbroke has proven its hotel management skills in many markets, it has no real track record in the unique US lodging industry. Says one analyst, 'Hilton is a great name, but it's not necessarily a perfect match.' On balance, however, the potential benefits would appear to far outweigh the risks of the move, in large part because it also opens enormous opportunities for Ladbroke eventually to integrate its hotels and gaming operations in resort and leisure complexes, which many industry specialists believe will be the profit centres of the leisure industry in the future. In anticipation of cashing in on that opportunity, George is contemplating a future change in the group's name, to underscore its leisure-sector focus and distance it from the racing image.

Whatever it may finally be called, Ladbroke Group still has some way to go before cautious investors will have the confidence to back the re-tooled conglomerate to win. But based on what George and his team have achieved so far, the time is approaching to consider the Ladbroke Group an excellent each-way chance.

LADBROKE: Financial Facts

Turnover/Profit By Activity*(£m)

Turnover Profit

Hotels 905.3 126.8

Betting and gaming 2,637.0 97.7

Property 160.7 32.0

Retail (discontinued) 657.7 8.0

Central costs & income - (16.0)

Interest - (120.0)

Exceptional items - (358.3)

Total 4,360.7 (229.8)

Turnover/Profit By Region*(£m)

UK 2,154.3 128.8

Continental Europe 679.4 44.5

Asia and Australasia 116.3 24.4

The Americas 689.8 28.5

Rest of the world 63.2 14.3

UK (discontinued) 657.7 8.0

Interest/ exceptionals - (478.3)

Total 4,360.7 (229.8)

Shareholders' funds (£m) 1,904.3

Number of employees 55,248

* for year to 31March 1995.

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