Making sense of the William Hill takeover bid

William Hill can’t seem to shake the spotlight, with news a Rank and 888 consortium is looking to launch a ?3bn takeover bid causing the industry to once again revise its view of the value of one of the stalwarts of the sector. After a tough trading period and CEO James Henderson stepping down just a few days ago, it’s easy to view this as a speculative move from the consortium to snap up a prize asset at a discount price.

It’s almost like the plot of a made for TV drama. The rebuffed suitor (William Hill) finds itself approached by the firm that rejected it (888) and its new partner (Rank). Just for added melodrama the new partner is run by a man who left the rebuffed suitor in the past under somewhat cloudy skies. While 888 will still be smarting from its failed attempt to acquire bwin.party. There are more layers to this than a Viennetta.

Speaking to executives in the sector there seems to be a relatively broad consensus that any deal between the three groups is unlikely to get over the line as it stands. The first rather obvious stumbling block is Hills’ seeming reluctance to be part of a three-way consortium with Rank and 888. Its statement, while leaving the door open to negotiation, was not exactly welcoming to the potential takeover.

“The Board of William Hill would listen to and consider any proposal which might be forthcoming from the Consortium. However, 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 which is focused on increasing the Group’s diversification by growing its digital and international businesses,” the statement said.

The obvious rejoinder to this is that perhaps William Hill is not asking the right question. Is its current strategy the right one for William Hill? Would it be better off partnering with a casino operator on its own technology and CRM platform, for example, rather than trying to build out its own capability? Rather than limiting its focus on retail as a growth platform, would it benefit from having an expanded and multi-vertical retail solution to cross-sell into its huge range of products?

Who’s the Daddy?

What is less clear from this deal is who the driving force would be. Unlike the other mega-mergers we’ve seen to date this is not the case of a runaway success story linking up with a well-established brand that can benefit from its momentum. There is no Betfair, GVC or Gala Coral here. Both Rank and 888 are solid, impressive firms but neither is shooting the lights out right now.

888 posted a 6% revenue increase and a 20% fall in adjusted EBITDA, with EBITDA down 39% in its 2015 results, although it should be noted the Point of Consumption tax and back taxes in Romania and Austria had a major impact there. Rank posted 1% EBITDA growth and 3% revenue growth in the six months ended December 2015 and showed similar low single digit growth in its most recent results update.

This isn’t to underplay the strength of either business, with 888’s core business still very strong and Rank at an inflection point with some considerable upside growth in the business. But it does suggest convincing the board and the city of the strategic benefits here may not be simple. That said, on a top level analysis there are some obvious conclusions that can be drawn.

The first is this is a firm that could dominate the UK market. Rank operates one of the leading bingo brands in the UK, 888 operates one of the two main bingo networks, William Hill is the UK’s largest casino operator and a top two sportsbook. In the land-based sector Hills is also the largest operator of betting shops and Rank is the largest casino operator and the second largest bingo operator.

While much is made of international expansion, in the regulated sector this is not a strategy that is likely to lead to huge immediate returns. Few operators are making profits in Italy, Spain, France or Denmark and recent regulated market openings have seen tax rates set at punitively high levels. As a long-term play regulated expansion is the only logical strategic move, but it’s not going to make anyone rich in the short-term.

The UK remains massive in the context of Europe. With ?4bn in revenues in 2015 it’s around a third of the entire European egaming market and more than five times the size of the Italian market. To discount the benefits of a three-way deal here simply because it’s too UK-focused is perhaps to miss the real short-term opportunity.

Drivers of the deal

The second major driver is the complementary nature of the businesses. Rank is a powerful gaming operator in the retail sector, and we’ve seen with Coral recently just how powerful a well-considered cross-sell strategy can be when converting land-based customers to online. 888, meanwhile, is seemingly strong in many of the areas William Hill is weak: CRM and ROI-driven acquisition, with its own in-house content and platform.

The third is the international potential. 888 has a considerable international presence with a strong grip on the Spanish market. Rank is mostly a UK operator, but it does have a land-based presence in Spain and Belgium. 888 is not shy of a grey market opportunity, and this is something William Hill is now looking at with fresh eyes as it looks to boost flagging revenues. Whether either firm has the appetite for Asia or South America is unclear, but there is no doubt this is where several other firms of varying scales are casting a careful eye at the present time.

But equally there are many questions. Who will lead this newly combined firm? How closely integrated will the businesses be? Will it be split up into land-based and online operations or will they try and drive synergies and cross sell between those parts of the business? What markets will they target? Whose platform will they use? And the list goes on.

How will they realise the benefits is even in doubt. 888’s gaming management skills are not really in doubt, but there are question marks on how easily that experience and technology could be brought to bear on Hills’ sports betting business. Likewise, while William Hill’s platform could massively accelerate Rank and 888’s nascent sports betting businesses, could this even be at the expense of Hills itself as the two steal market share?

The sheer volume of questions over this potential combination suggests it’s unlikely to complete without some seriously compelling strategic rationale emerging from the consortium or a massive price tag being slapped on William Hill. And it could be that this is the first stage in a negotiation process that sees another combination emerge from the ashes of this initial attempt.

But it would be foolish to write this deal off just yet. This is a hugely disruptive time for the sector at a corporate level with the well-worn list of power players being rewritten on a monthly basis. It may feel like history suggests this deal won’t make it to the final stage, but the past is perhaps the worst guide to the future right now.