For us, it’s more significant that William Hill (LON:WMH) has received a takeover approach, rather than the details of the potential offer itself which remain unclear, apart from that it may come jointly from 888 Holdings Plc. and Rank Group (LON:RNK).
What’s more important from our point of view is that the mooted offer confirms a view we’ve had for some months and which crystallised before the EU referendum—that William Hill is as good as ‘in play’, (the sudden departure of its CEO James Henderson last week is another hallmark of this status).
On that basis, it’s conceivable to us that 888/Rank will not be the only party to express an interest in Britain’s largest bookmaker group by revenues in 2015.
In fact, whilst we are cautious given the sketchy level of detail about the joint offer, we would tend to agree with William Hill’s statement that "It is not clear that a combination of William Hill with 888 and Rank will enhance William Hill's strategic positioning or deliver superior value to William Hill's strategy.”
The pair is seeking scale on the bricks and mortar/turf side, but for the bookmaker, such a deal—at the mooted price—looks more like a moderate diversification than an expansion, right now.
And, assuming that interest from a larger core industry group at this point would be a non-starter on competition grounds, we think the likeliest strategy a William Hill consolidator would pursue would be to beef up its online offering and prowess. If so, to our minds there are leaner, purer-play technology-focused candidates who could take that strategy forward.
Playtech (LON:PTEC), for instance, would have to lever-up less than 888/Rank combined, judging by its latest free cash flow and operating margin. By extension we would also suggest overseas-based groups like Amaya Inc. might be interested in a group like William Hill, though the credibility of potential acquirers outside of the UK would decline rapidly from that candidate onwards, in our view.
The matter of agreement over takeover price has the potential to be a bigger sticking point than is often the case in M&A. Taking Ladbrokes-Gala Coral as a rough benchmark, in that case the offer equated to about 7.9 times Gala’s prior-year core earnings. William Hill’s £343.8m core result in 2015 equates to £2.7bn/$3.6bn, the value of the offer currently cited by some reports and close to the group’s market value on Friday.
Weakening earnings and falling online sales make a case for a premium that is only incrementally higher (if higher at all), but we expect William Hill’s board to push for a price that essentially takes into account sterling’s 10%-13%% decline in 2016, suggesting an offer no lower than £3.1bn would be acceptable.
Overall, we don’t rule out a bumpy road before consolidation of William Hill, and it’s too early in the process to be confident that the current offer has much staying power, but we continue to think William Hill’s days as a standalone operator are numbered.
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