Going Private in the Cards for Rank?

17 October 2008

Rank Group, the land-based and remote gambling operator, revealed total revenue has fallen in the 41 weeks to Oct. 12, but continued stake-building by its largest shareholder raises questions on whether the company will be taken private.

Results have been mixed this fiscal year for Rank. Although total revenue across the company's estate was down 6 percent in the 41-week period, like-for-like revenue since Sept. 1 was up 5 percent.

The Maidenhead, England, company, which operates Mecca Bingo and Grosvenor Casinos, attributed the six-week uptick to stronger performances in bingo, up 2 percent, and casino, up 14 percent.

Significantly, the second-half downward revenue trend anticipated in the company's first-half results appears to have been curbed, though growth in Blue Square, Rank's online betting and gaming arm, has tapered off from 3.1 percent to 1 percent.

Across the 41-week period, total revenue for Mecca was down 13 percent. The bingo chain was hit hard by tighter machine regulations (set forth in the Gambling Act 2005), smoking bans in England, Scotland and Wales, downward pressure on consumer spend and lower admissions. Total revenue for Grosvenor, meanwhile, fell 2 percent on lower admissions.

Top Rank España, the company's Spanish bingo operation, grew total revenue by 6 percent. While the company didn't quantify, Top Rank has been affected by "difficult prevailing economic conditions in Spain."

Blue Square -- which Rank picked up from Michael A. Spencer's Intercapital Private Group Ltd. in 2003 -- was hit by an 11 percent decline in sports betting revenue, which offset a 7 percent rise in gaming led by its Mecca Bingo Web property.

While the company has acknowledged that the broader economic climate remains uncertain in the near term, it said it retains a positive long-term outlook on both the growth potential of the gaming industry and the prospects for its business within it.

Guoco Group Ltd., the investment arm of Hong Leong Group Malaysia, has again bumped up its stake in Rank -- from 23.19 percent to 24 percent. City analysts believe that the company will ultimately make a bid for Rank. If a bid is made and accepted, the possibility exists that Rank could be taken private.

Conceivably, the move would protect Rank from negative movements in a volatile market; its share price, for reference, has fallen 44.57 percent in the year to date. With stake-building ongoing, a turnaround in like-for-like revenue and the specter of the Gambling Act 2005 more than a year in the rearview, the 2009 fiscal year is undoubtedly one to which Rank looks forward.

Rank, with a market capitalization of £234.3 million, was up 3.75 pence, or 6.67 percent, to 60 pence.

Click here to view Rank's Interim Management Statement.

What the Analysts Say

Rank delivered a steady trading update, particularly given the current economic climate, re-iterating the relative resilience of gambling and highlighting the fact that regulatory changes are far more material to the gambling industry than the macro economy. The 11x P/E next year offers upside potential long-term but with so many cheaper stocks in the sector, we remain relative Sellers.

Andrew P. Lee | Dresdner Kleinwort

Rank's IMS demonstrates a strong rebound in revenue since the half year end and in particular over the last six weeks with like-for-like revenue up 5.0%. We retain our PBT forecast of £31.9m and with no near term financing risk we think Rank shares will respond positively to this update.

Richard Carter | Numis Securities

The declining 2H revenue trend reported with the 1H results on 31 July appears to have been halted and management is on track with cost reductions. Rank has suffered its own private recession as a result of regulatory change in 2007 and is on a gradual recovery path. Without the stake building activity we might be more cautious but, as a well-funded shareholder continues to pick up shares, we take the view that the business is one of the few to have the chance of being taken private.

Ivor Jones | Evolution Securities

Based on in-line trading, as well as a recent return to form in the London casinos (albeit from higher-risk/roller customers) and upside from the roll-out of additional high-jackpot machines (B3 £500 jackpot machines across bingo in-hall Adult Gaming Centers) partially offset by online weakness, we retain our earnings estimates (FY08E 4.9p, FY09E 5.5p) and 55p price target.

James Hollins | Daniel Stewart & Co.

Chris Krafcik is the editor of IGamingNews. He lives in St. Louis, Mo.