Analysis - why FOMO is one of the drivers of the William Hill/888/Rank major merger

Analysis - why FOMO is one of the drivers of the William Hill/888/Rank major merger

Tuesday, July 26, 2016 Posted by Andy McCarron
Do bingo halls, betting shops and casinos have enough synergies for this collaboration?

The remorseless logic of the consolidation fever currently overtaking the gambling sector dictates that there are no prizes for sitting on the side-lines while competitors scramble around seeking partners in the M&A waltz.

If this is true for the operators, then it is even more so for the investment bankers. It was noticeable then that in the stock exchange release from 888 and Rank announcing a consortium bid for William Hill that Morgan Stanley were credited as the financial adviser to both companies.

Neither Rank (which has Peel Hunt as its corporate broker) nor 888 (with Numis and Investec) has Morgan Stanley named as their corporate broker on their investor relations websites. It suggests the possibility that the initial idea for the three-way consortium scheme was dreamt up in the investment bank’s Canary Wharf offices rather than in the Maidenhead and Tel Aviv headquarters of the respective partners.

Whoever made the call to whom, it certainly shows initiative. The consortium idea would create a gaming giant with – on paper –revenues of circa £2.7bn before any synergies kick in. For each of the companies involved it would provide an immediate answer to the questions posed of by the deals that have taken place elsewhere in the past year –the yet-to-complete Ladbrokes Coral combination, Paddy Power Betfair and GVC’s reverse takeover of BwinParty.

Notably 888 failed in the bidding tussle for the latter and also has previous when it comes to both Ladbrokes (having twice been down the aisle without finally getting to the altar) and William Hill. Price was an issue in all instances. In the first, 888 was outbid (despite the BwinParty board’s recommendation) and in the latter instances where it was the offeree the deals were rejected by its own shareholders as undervaluing the business.

Yet the fear of 888’s management of being characterised as an M&A wallflower perhaps explains the company’s eagerness to do a deal which would catapult it into the front rank of global gambling entities. A similar impetus also perhaps accounts for Rank’s’ involvement. The key phrase in the scant communication we have seen to date talks the “significant industrial logic” of the proposal.

The consortium is certainly making an approach at what would appear to be an opportune time. Though the talks have likely been in progress for a few months - and hence predate James Henderson’s departure as William Hill chief executive last week – they come when that company is suffering a downturn in its fortunes. A profit warning in March, caused by an upsurge in player self-exclusions and a bad run of sports results, has been followed by much soul-searching in the online business where new managing director Crispin Nieboer has been installed to turnaround the operation’s fortunes.

In truth, it is hard to divine the extent of the problems. The William Hill board is unlikely to find it too difficult to convince shareholders that rather than major surgery, the simpler expedient of the installation of a new chief executive can go some way in reviving the company and provide the leadership it needs across its retail, online and international operations. Indeed, one of the ironies of the Rank/888 bid is that the chief executive of the former, Henry Birch, was commonly thought to be the favourite in the running for the William Hill job.

We can presume that won’t now happen, unless there is a sudden twist on the tale. But whoever takes over from Henderson will face a far less arduous task at William Hill than that which would confront whoever is being primed to weld together the proposed consortium. Times might be tough for William Hill, notably from increased competition from either newly merged or soon-to-merge entities. But the level of what the City likes to call execution risk – the balls-up factor – is far higher with the consortium proposal than with William Hill alone.

Yet, if William Hill’s board and shareholders do indeed reject whatever deal is put forward by Rank and 888 before the August 22 deadline it will likely be merely mark a pause in the sector’s merger chatter.

Maybe not even that. Arguably the most pertinent driver in this latest spin of the M&A merry-go-round is the FOMO factor - the fear of missing out. Managements and shareholders are scared of being left with sub-scale businesses at a time when costs (particularly online taxes) are on the increase and competition is getting tougher.

Totally Gaming Says: This particular deal might not prove to have legs but regardless the approach won’t be dismissed lightly by the William Hill board. They will know that it signifies that the company is in play. The incoming chief executive at the company will have industry consolidation likely at the top of their agenda. Likewise, 888 and Rank might carry on with a potential merger regardless or go in search of other deals and combinations. The centrifugal forces that have taken hold of the gambling world aren’t showing any signs of weakening just yet.

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