Six questions from William Hill’s MRG acquisition
How much grey is too grey and where will the synergies come from?
William Hill finally joined the M&A fray earlier this week with the £242m acquisition of MRG Group.
Hills said the key drivers behind the deal were diversification of revenues, both in terms of geography and the online/offline split.
However, there are also some unanswered questions following the transaction:
Has Hills bought high?
The £242m acquisition equates to around 13x TTM EBITDA, which several analysts suggested was on the high side. Eilers and Krejcik analyst Alun Bowden said: “MRG has been one of the top performers in 2018 but the growth story from here is less obvious and contains potential downside risks.
“The regulation in Sweden is not necessarily a net positive with the imposition of 18% tax rates, a big limit on bonusing and undoubtedly a hugely competitive marketing environment. “Germany is another important growth market for both MRG and Hills and while the entire industry is ploughing money into Germany at the moment, the regulatory profile is far from certain there around casino.”
How much grey is too much grey?
The acquisition follows a renewed focus on grey markets from Hills, with just 17% of MRG revenues regulated at present. And Regulus Partners raised some concerns with around 8% of MRG revenues coming from ‘dark grey’ markets in Finland and Norway, while Germany faces its own “acute pressures”.
Bowcock however was quick to point out the regulated revenue figure rises to 41% when including ‘regulating’ markets and 77% when including markets where Mr Green pays tax.
“It isn’t as though this a business full of grey and murkiness,” Bowcock told EGR. “It’s almost exclusively European; we’re not buying China or third world revenues.” He said Hills would not be cutting off any of the ‘long tail’ to maintain compliance for the US market.
Where are the synergies coming from?
Hills guided to at least £6m in synergies, although Barclays analyst Patrick Coffey suggested this was quite low given the scale of the transaction. A chunk of the cost cutting could come from consolidating suppliers, with MRG using Kambi for its sportsbook and NYX for its player management back-end.
Bowcock said those cuts were part of the synergy figure, and the £6m mark was a minimum figure, with the actual number potentially higher. He also said the deal was not just about cost synergies but also some potential revenue synergies.
“This is not just about closing offices. This is about acquiring a growth business and continuing to grow the business,” he said. He said sports could be a key area for growth with Hill’s trading and operational expertise used to improve the MRG sportsbook offering.
More M&A on the way?
Swedish analyst Kristoffer Lindström told EGR the deal could spark more consolidation in the Nordics, with the larger Swedish operators as targets. The market appeared to agree with multiple Swedish operators seeing significant uplifts in share prices since the deal was announced.
Today’s WillHill offer to buy MrGreen with 50% premium, will lift the whole swedish igaming cluster. More funds and liq. will circulate and premium consolidating will be valuated higher in cases
— OrakelO (@Orakel_O) October 31, 2018
Wil the two companies fit culturally?
Some questioned whether the UK legacy operator would be a good cultural fit with the start-up style Swedish firm, but Bowcock dismissed these concerns.
“Having done a number of transactions in another life, cultural fit is often underplayed and in the getting-to know-you conversation, we have seen a good cultural fit across the two businesses,” he said.
“That’s helped by having Ulrik Bengtsson on board. Clearly Ulrik knows the Nordic market inside out, he lived in Malta for a number of years, he knows the senior management team of Mr Green, and understands the culture and intricacies of operating in a Swedish work environment.”
Is Hills buying any proprietary technology?
As noted above, MRG uses Kambi for sportsbook and NYX for the back-end, but Bengtsson pointed out the firm has developed lots of proprietary middleware and front-end technology that could be useful to Hills. Bengtsson added: “Perhaps the most important piece is the payments system which they have built an in-house platform for.” He said there was an opportunity to bring that in-house and save on some provider costs.