Ladbrokes confirms talks with 888 despite fears over US 'poison pill'

SHARES in online gambling group 888 surged yesterday after it confirmed it was in talks with Ladbrokes over a possible takeover by Britain's largest bookmaker.

Both companies confirmed they were in very preliminary discussions, but spokesmen said they had nothing to add.

The two companies held talks four years ago, but these were aborted because of Ladbrokes's concerns over the threat of possible retrospective legal action in relation to 888's activities in the United States before the online gaming industry was outlawed in that country in 2006.

Online gaming rivals such as PartyGaming and Sportingbet have reached settlement with the US department of justice to give them immunity from prosecution, but 888 has not so far done so.

Industry executives and City analysts said this could still scupper a takeover this time. "This may be a barrier to a bid," Richard Taylor, leisure specialist at Liberum Capital, said.

An online gambling industry executive said: "The deal does make sense from Ladbrokes's viewpoint because the 888 platforms are good. It would be a case of Ladbrokes gaining proven technology.

"But the financial difficulty about a bid is what does Ladbrokes value the 888 shares at as the company has not yet settled with the department of justice? It is an overhang on a deal that otherwise probably makes quite a bit of sense."

Shares in 888, which had lost two-thirds of their value since January, closed up 18 per cent or 8.75p at 57.75p.

Simon Davies, an analyst with Collins Stewart, said a price of 70p would probably be well received by 888 shareholders, but also expressed concerns over the spectre of American litigation.

"We believe a 700p offer should be a slam dunk for (888] investors, but see significant regulatory risk to a successful transaction given that 888 has not procured a non-prosecution agreement with the US department of justice, which represents a potential poison pill," Davies said.

The latest potential deal in the online gambling sector follows the merger of PartyGaming with bwin in August, and would represent the first inorganic corporate activity by new Ladbrokes chief executive Richard Glynn, who took over last spring.

Analysts said a deal made sense strategically, marrying Ladbrokes's strong betting shop business with 888's casino offering. It would create a combined online gambling business with annual revenue of 350m and earnings of 85m.

It is believed the two companies could save about 25m a year in shared technology, marketing and overhead costs, analysts said.

That would make the transaction about 10 per cent earnings-enhancing by 2012.