Vernons has survived the National Lottery big guns by slashing costs – enabling it to maintain small but healthy profits. This has made it an attractive target for main rival Littlewoods but can it persuade parent Ladbroke to sell?

It’s official: Vernons Pools is not for sale. And that is the final word from parent company Ladbroke’s press spokesman. Unless, of course, someone offers a high enough price.

Then, the spokesman admits, Ladbroke would have a duty to its shareholders to consider the offer. But, he assures us, Vernons has not been put on the market and is certainly not seeking a buyer.

Despite seeing its turnover fall by 70 per cent since the launch of the National Lottery in November 1994, Ladbroke insists that Vernons can be built into a profitable core business to sit alongside the other Ladbroke divisions: Hilton Hotels, the Ladbrokes betting chain and the casino division.

This, however, will take some work. Vernons’ profits have plummeted from 15.4m in the year to December 1993, to an estimated 6m for this year. Turnover has more than halved from 165.7m in 1993 to an estimated 70m this year.

Littlewoods Pools, Vernons’ giant rival based a few miles away across Liverpool, has shown that it has an interest in taking over Vernons. Last week, it put out a cryptic statement indicating that it had talked to Vernons about the move, but was waiting for Ladbroke to put the business up for sale (MW September 18).

“We are talking to Vernons about a variety of industry matters, but none of these discussions is likely to result in Littlewoods buying Vernons,” said the statement, which implies that the subject has been discussed. “This is a hypothetical situation which has no firm base because Ladbroke has not said it would like to sell Vernons to us,” the statement continued.

The implication here is that Littlewoods would like to buy Vernons, if only Ladbroke would put it up for sale.

Both companies have seen the pools market devastated by the National Lottery. Littlewoods, which holds about 80 per cent of the pools market, saw turnover drop to 459m for last year from 853m in 1994. Operating profits fell to 22.8m from 25.3m in 1994. Other small pools operators, such as Zetters, have also suffered.

But Vernons and Littlewoods have responded in different ways to the problem. Their distinct strategies suggest they would fit hand in glove if a merger went ahead.

Littlewoods has maintained the system of collectors who deliver pools coupons and pick up the cash. It has 53,000 self-employed collectors around the country. The company says 80 per cent of its pools business comes from this operation, compar-ed with 20 per cent from direct marketing.

But Vernons has pulled back from using collectors. It has withdrawn them from most parts of the country, retrenched into urban areas, and is now concentrating on direct sales. The company has built a database of 5 million names, operated by CCN, and markets to 1 million of these “active” names directly to their homes by post or telephone.

But whichever distribution system is used, direct mail or doorstep collections, one thing is clear. The pools is on its way out.

“The pools is a product that it is nearing the end of its lifecycle,” says Vernons Pools marketing director Peter Ammundsen. “As people stop playing it – and many are elderly – they are not being replaced. It is not attracting new, young people.”

With the knowledge that the pools operations of Vernons and Littlewoods are on course for a no-score draw, the words “new product development” have an urgency not found in many marketing departments. Ammundsen, and his rival Tony Hillyer, Littlewoods commercial director, have to design some popular new games, or face slow, painful death.

“How can Ladbroke build Vernons?” asks one highly placed industry observer. “It hasn’t managed to do it so far. It is madness to have two main pools companies, and it is self-evident that this situation won’t continue. Both have struggled in the face of the Lottery.”

But it is not only Littlewoods that has considered buying Vernons. It is understood that the Malaysian backers of the failed NHS Loto looked at Vernons two years ago. They were seeking a vehicle through which they could enter what they saw as the lucrative UK gaming market. Nothing ever came of the discussions, as the Malaysians decided that NHS Loto would be a safer bet. How wrong they were – it is thought they lost millions when NHS Loto was withdrawn (MW June 5).

Even the Lottery operator Camelot considered launching a bid for Vernons. This would make sense if the company lost the licence to run the Lottery, as now seems possible. In Vernons, it would have a vehicle with which to continue in the UK gaming market, with a ready-made customer base and an extensive database of players.

Though this acquisition plan seems to have fallen by the wayside, there are still plans afoot for the two companies to link up and market games together. It is thought early discussions about collaboration involved putting Vernons Pools coupons through Lottery terminals. It is difficult to see how this would benefit the Good Causes for which Camelot is obliged to raise funds, and which are necessary to gain approval from the regulator Oflot.

Vernons is now believed to be looking at a National Lottery game, which it would run and whose proceeds would go to the Good Causes (MW March 21). For this to happen, it would need to throw open its books to Camelot and detailed discussions of its finances, under Oflot rules, would be required before they could strike a deal. That would make it more vulnerable to take-over by the Lottery operator, which would gain much-needed financial information.

Speculation in the City, and in the gaming industry, is that Littlewoods is the prime candidate to take over Vernons, but this has not always been the case.

Indeed, in 1995, it looked as if it would be the other way round. Ladbroke, along with Iceland and mail order catalogue company N Brown put together a consortium to take over the whole Littlewoods empire, with Iceland running the shops, Vernons taking over the pools and N Brown running the mail order division.

In the event, Littlewoods rejected the idea of selling up and decided to make a go of it, bringing in new chairman James Ross to redefine its position. His aim is to concentrate on mail order retailing through Index, and put in a bid for Freemans. High street retailing through the Littlewoods Stores is plagued by the division’s poor performance, with 1996 results showing flat profits and margins under pressure. Ross sees the leisure market as another core area for Littlewoods. So a takeover of Vernons would fit in with his policy of expansion through acquisition.

But not all agree that Vernons is doomed to a profits slide. Paul Heath, leisure analyst at UBS, says: “Vernons is such a small profit centre for Ladbroke, the only way to make headway is to cut costs. The business was stable until the arrival of the Lottery. If it is given sufficient stimulus, it could be a small but viable business.”

Vernons’ marketing director Peter Ammundsen argues that the company has staunched its profit haemorrhage by investing heavily in direct marketing. In the first half of this year, profits slipped to 3.2m from 3.4m in the same period of the previous year. But along with this came a collapse of turnover from 45m to 33.2m – a fall of 12m. Clearly the policy of radical cost-cutting managed to ensure profitability.

The magnitude of National Lottery sales (at nearly 5bn a year) suggests there is a demand among the public for soft gaming – gambling where the odds are just too long to predict. But nothing that either Littlewoods or Vernons has come up with over the past three years has caught the public imagination like the Lottery.

Littlewoods gave us QuickPix, which disappeared a few months later. Then it came up with Top Spots, which has gone the same way. Vernons tried Break Opens, a variant of a scratchcard game popular in the US, but this flopped as well. Its latest attempt to draw in younger players is the launch of a coupon for the European Champions Cup.

The successes of Lottery sales, combined with the immense and growing popularity of football, should mean that both Littlewoods and Vernons ought to be able to develop some kind of game with great popular appeal. While the pools is likely to decline, it will no doubt still be around for many years to come, in one form or another.

Vernons is a small enough company to make it an easy takeover target, even by a small player or new entrant into the market. It has implemented tough cost-cutting measures that seem not to have damaged profitability.

The company has a plush head office near Aintree Racecourse, opened in 1991 at a cost of 6.5m. Purpose-built for a traditional pools operation, it must seem rather large and draughty for the new slimline Vernons. Littlewoods might be interested in taking the building as a place for its own business.

Either way, the head office is a valuable resource for any potential predator.

Whatever happens, Vernons and Littlewoods need to come up with new types of games to fight the incursions of the National Lottery.

Many eyes are on the UK as a hugely lucrative market. Overseas investors, such as the Malaysians who bought the NHS Loto operation, may see Vernons as an ideal beachhead to enter the UK gaming market.

The more likely scenario of a takeover by Littlewoods depends on one important factor: Ladbroke putting Vernons up for sale.

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