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October 12, 2009



Hi Chris,
The only obvious thing that's wrong with your argument is that earnings (i.e net income) is not the only multiple that people take into account when valuing a business. Others such as price to sales or price to book or enterprise value to sales or enterprise value to EBITDA or enterprise value to EBIT can all be taken into account (depending on the nature of the business).

Another thing you need to take into account is how attractive the target might be to another business. If one company thinks it can derive major advantages by buying another (for instance from cross selling opportunities or from economies of scale or cost cutting), it might be prepared to pay more than the usual multiples to get its hands on a target.

In addition, a thing called control premium often applies, where the bidder has to pay a premium to get control of a company. A market capitalisation based on stock market trading wouldn't include this (control has a certain extra value that just being a non-controlling shareholder doesn't, and often companies have been prepared to pay more to get control of a company than that company has been trading for on the stock market, sometimes considerably more).

A large part of the price will also very probably be dictated by how desperate the seller is to sell (and how quickly it feels the need to do so), how desperate the bidder is to buy, and also how many serious bidders there are (several bidders desperate to buy will bid the price up).

Another possible factor is how canny the various financial advisors involved are and how good each is at negotiating a price. I expect there are further factors still.

Given all that, it is still possible that it would not be possible to get a sufficient price for the Tote to make selling it worth the government's while. All I'm saying it that an earnings multiple alone is not really enough to predict the price that could be achieved for any given target with any degree of certainty.


Back in October 2007, Ladbrokes and William Hill said they would take legal action in Europe if the Tote was sold for less than £400m! [1] I have no idea how that figure applies to the current situation, though I think the Ladbrokes share price is affected by its debt.

1. http://www.onlinesportsbetting.co.uk/tote-sale-issues.shtml


@ Al - Since October 2007, Ladbrokes price has fallen by two-thirds. Based on that simple comparator, Ladbrokes should now consider a fair price for the Tote to be around £130m - which is not enough on my reckoning to make the sale worthwhile.
And yes, Ladbrokes does have almost £1bn in debt. But even if we add this onto its market cap, it suggests the Tote would sell for less than £140m.
And, of course, it's quite possible that any buyer of the Tote would add debt to its balance sheet as well.
@ Laura - All your points are good, in principle. The question is: do they apply to the Tote sufficiently to generate a high multiple?


It's not a question of if these apply to the Tote, it's a question of how you value any business.

I would be very surprised to see the Tote or anything other business valued solely on the basis of its bottom line. It would be like valuing a house on the number of bedrooms it has. It sounds plausible at first and does have a significant impact, but it's not the only thing that has an impact and it's not necessarily the most important thing by a long shot. Even assuming you consider using the same sector for reference for a business equivalent to using houses from the same county for reference for a house, things like size of rooms, state of repair, modernness of bathroom/kitchen, number of bathrooms, number of reception rooms, size of garden or whether it comes with 300 hectares of farming land, whether it comes with garages or stables, whether the house is ex-council, school catchment area and the exact location will all have an impact - some bigger than others. It's not a case of moving up the value from your figure, it's more a case of saying your figure isn't based on enough data to be valid in the first place.

For all I know, after the other factors have been taken into account, you might have massively over-valued the Tote. On the other hand you may have massively undervalued it or, most unlikely of all, Ladbrokes may be the only appropriate sector comparison and the all the other factors precisely cancel each other out, leaving you bang on the money.


I have no further input on your sums although Laura is certainly right that other factors can affect the value of the business.

"Or is it that Brown is a deficit fetishist, obsessing about the current deficit, and forgetting about future ones?"

What makes you think that Gordon Brown's horizon goes beyond next May? And why should it?


Why should the state run a bookies?


I don't think gilt yields are the right comparator. It should be the return on how the government spends the money it would otherwise have used to pay down the debt.


The Dartford tunnel may be a less complicated example.

As far as I can make out this generated an operating surplus of £65m last year.

The book value of its assets totalled £689m.

Whether anyone would pay anything like £689m for it without a firm promise that it can significantly hike up charges/tolls is anyone's guess.

However assuming for the sake of argument that that does sell for c.£690m the proceeds would reduce the cost of servicing the national debt at 4.3% by £29m p.a. - but at the cost of losing us £65m p.a. in revenue.

Plus the luckless residents of the Thames Gateway region would almost certainly end up paying significantly more for the privilege of crossing the Thames.

Tried to do a similar calculation for Urenco but all I can see from their annual report is that the UK govt should have got a dividend of around £30m from it's 33% stake last year - can't get my head around what the sale value of what that stake might be but would guess its in the £several hundred million ballpark - so we are probably again looking at selling an asset that generates 9 or 10% p.a. in profit in order to pay down a national debt that costs 4.3% p.a. to service.

bill quango mp

Brown has never been much of a betting man.

The reality is that this is a political decision. The government is doing SOMETHING about debt. But it is not cutting services or raising taxes. Its a fairly empty gesture on all fronts. Even on the political it leaves labour open to charges of being the privatisation party.

But then when the barrel has already been thoroughly scraped once ..


On why the govt feels it necessary to operate as a bookmaker, isn't this mostly down to "Lord" Woodrow Wyatt who as an influential political columnist (and one time Labour MP - he co-presented Labour's 1959 party political broadcasts with the then Anthony Wedgewood-Benn but moved ever rightwards thereafter) was given Chairmanship of the Tote by Harold Wilson and retained it throughout the Callaghan, Thatcher and Major years.

Selling the Tote would certainly have been an obvious wheeze to Thatcher and Major (and IIRC was regularly advocated by the eager young privatisers of the ASI and IEA) but this would have deprived Woodrow of a nice little earner - and given the strong vicious streak that is evident in his posthumously published journals and his frequent claims to know where quite a few political bodies were buried this might well have had unfortunate consequences.

Why even after Wyatt was removed from the scene by the Grim Reaper Brown thought it made more sense to sell 359 tones of gold at the bottom of the market rather than the Tote during a decade-long boom in gambling is however something of a mystery.


I would agree its pure politics - Labour know they have no chance of finding any buyers or closing any deals between now and May 6th so it makes no practical difference what they announce now.

As Philip Hammond rightly pointed out none of this is actually new - the Tote idea was floated in 1999 made it into the 2001 manifesto and was seriously discussed last year, Urenco was discussed in 2005, the Student loans portfolio sale promised in March 2007 etc.

Best they can hope for is that a few votes might somehow be swung around by the impression that Labour is doing something about the deficit - and that if there is a miracle and Labour are still in govt on May 7th they will be able to delay these sales again for more propitious times.

Simon Stephenson

Surely no one is going to buy the rights to a revenue stream for a price that gives them a return of as little as 4.3%? So debt-interest saving is never going to be as much as revenue loss UNLESS the government adds in sweeteners to the deal that allow an increase in the projected future revenue flows.

For example, Dartford. The current revenue flows are presumably far below those which could be achieved by a minimally controlled monopoly, so if in addition to flogging the asset, the government formally commits to a high-sounding but toothless regulation regime, it's not out of the question that the sale could generate a much higher price than current numbers indicate.

Is there an EU problem with this, though?

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