Heading for the Hills: Has Caesars undervalued William Hill?

When William Hill announced that it was at the heart of an M&A bidding war between US casino behemoth Caesars Entertainment and US private equity firm Apollo Global Management, everyone and their dog had an opinion on the value of the 86-year-old business and its many moving parts. In the end, Caesars appears to have won the race for Hills with its $3.7bn offer, which is valuing its stock at $3.50 per share. As part of the deal, Caesars will take control of the remaining 80% of the two parties’ US joint venture (JV).

Caesars has plainly laid out its goal to leverage Hills’ expertise in the US betting space, including its part in-house operated betting technology, the details of which Hills has kept very close to its chest. Back in February 2019, Hills US hired former Amazon AWS Cloud Drive group manager Martin Logan to lead the development of its tech, including trading and risk management and player account management processes, the latter of which is a part of Hills’ JV with NeoGames.

The platform was subsequently launched in time for the 2019 NFL season and was not spoken of again until William Hill Group CEO Ulrik Bengtsson briefly mentioned the platform’s ongoing development following the firm’s Q1 2020 results in February. Bengtsson said: “It is a continuous process to build a platform, but it performs really well for us during high peak loads in New Jersey, and we will continue to roll it out throughout the year.”

Beyond that, the operator has remained shtum on the development of its in-house operations, and in November 2019 it acquired betting firm CG Technology and a host of retail sportsbooks in Nevada, where Hills was then estimated to have a 26% market share, according to UK industry analysts Regulus Partners. The integration of CG Technology has been ongoing throughout this year.

In a recent investor prospectus to help it raise $2bn in debt, Caesars said that the William Hill  acquisition would contribute to “a world class portfolio of assets and brands, including William Hill’s sports betting expertise, as well as its established technology program and roadmap (including its highly regarded scalable and secure Liberty Technology platform).”

Fast forward to today and there are a million unanswered questions surrounding Caesars’ intentions for Hills, with perhaps the most pressing being its plans for the non-US facets of the business and why it bought the entire group despite only having eyes for its US resources.

The price is right?

As Regulus Partners observes, William Hill US generates only 15% of group revenue, and as Bixteth Partners’ Simon French adds, its mobile betting firepower has yet to be demonstrated in the States. “This is a big sum of money [for Caesars] to bet on a nascent sector with no clear pathway to profitability, representing 15%-25% of its current enterprise value,” Regulus says in a recent analyst note.

“Caesars clearly has big aspirations for what it can achieve in terms of disposal proceeds for those [non-US William Hill] businesses because they’re trying to raise $2bn of debt against them, which is around about 5x EBITDA,” French tells EGR North America.

“The thing is you’re probably not going to get more than three to three-and-a-half times EBITDA in total value for the retail space, so [Caesars] is expecting to get a big multiple for the online assets,” he adds.

Since the deal was announced, a handful of analysts and Hills shareholders have lamented that the business has been undervalued, particularly when considering the price and market cap of some of Hills’ US peers. And while some are quick to flag DraftKings’ huge recent share price gains as a marker for the rest of the US market’s growth, DraftKings is somewhat of an anomaly in the space and certainly has first mover advantage over Hills, as well as a more mature mobile product offering.

However, boutique investment bank Union Gaming has said that the market is “overlooking the favorable business advantages of a combination between Caesars Entertainment and William Hill US with its market share position already sizable.” A note by Union Gaming analyst John Decree said the bank estimated the combined group could generate betting and igaming revenue that is comparable to DraftKings in 2021 and 2022.

“In spite of this, the embedded value of Caesars’ business is just a fraction (15%) of DraftKings’ market value. While we aren’t suggesting Caesars should entirely close the valuation gap, we do believe there is significant unrealized value here. The first step to unlocking that value is the pending acquisition of William Hill PLC that will give Caesars 100% ownership of the US joint venture.”

French is of the opinion that Caesars has paid a great price for a business that he says is “so far behind the curve.” “[DraftKings] has a ready-made footprint across the US from its DFS business, they have their own technology in SBTech, and they have got a top-two position in the market,” he notes.

“If you look at Hills’ peers having all roughly raised a billion dollars in the US [recently] to fund their expansion programs, would Hills’ shareholders be willing to help fund another billion-dollar fundraise for William Hill? I certainly doubt it.”

Former William Hill group CEO Ralph Topping agrees, adding that the takeover will be a relief for shareholders who were pressed for additional capital earlier in the year to mitigate Covid-19 struggles and fund the firm’s US ambitions. “This deal takes away the pressure from the board altogether,” Topping adds.

Dealer’s choice

There is also looming uncertainty over what will come of both parties’ market access and B2B deals with other operators in the US. One such partnership is 888’s World Series of Poker (WSOP) tie-up with Caesars, under which 888 powers Caesars’ WSOP poker product, along with its Harrah’s igaming site in New Jersey. The two parties have planned to launch the WSOP site in Pennsylvania if and when it joins the interstate poker liquidity pool currently shared between Nevada, New Jersey and Delaware.

Yaniv Sherman, 888 SVP and head of commercial development in the US, says the firm looks forward to continuing its partnership with Caesars and expects the Hills deal to bring about potential for 888 to provide its platform to new areas of the business. “Once they conclude this process, I’m sure they will turn and see how we can leverage this [partnership] even further,” Sherman adds.

Kindred Group, which has a contract with Caesars for market access in a handful of states, has also confirmed that its deal will not be impacted by the Hills takeover, and it plans to actively pursue a number of those states, including Ohio and Iowa, in the next year.

As Caesars looks to H2 of 2021 to complete this acquisition, what is becoming increasingly clear is the ambition of major US casino groups to penetrate the mobile betting and gaming space in the market. And with mammoth financial support and nationally recognized branding, these legacy operators are primed for success if they can secure the right technology and operational parts to their businesses.

It is worth watching the likes of Wynn and Twin River and where they might pivot their focus now that Caesars has made its own power play.