Why the Rank/888/William Hill merger looks dead in the water

Why the Rank/888/William Hill merger looks dead in the water

Thursday, August 11, 2016 Posted by Andy McCarron
Rank and 888 makes their case after William Hill board rejection

Rank and 888 waited until market close on Wednesday to issue their stock exchange statement detailing their joint £3.6bn consortium bid for William Hill, but the latter’s share price reaction during the day’s trading would suggest the bid is already dead in the water.

William Hill was down 3p on the day to 325p, 10% below the offer price of 364p, and this lacklustre reaction tells us all we need to know about the how market views the chances of any further discussions between the companies.

This morning, William Hill issued another statement re-stating its opposition to the bid and pointing out that there was nothing new in the 888/Rank statement the previous evening. The consortium is now required to either submit a firm intention to make an offer by 21 August of withdraw.

Such could have been the summation after William Hill so forcefully rejected the deal in its own announcement to the stock exchange on Tuesday. The Rank and 888 statement suggests the pair would “welcome the opportunity to engage with the board of William Hill” and it does strike a friendlier tone than the approach taken by 888 shareholder Eyal Shaked on social media on Tuesday evening.

But it is hard to see that it pushes the case for what it claims would be a “compelling value creation opportunity” any further. What was released yesterday was the bid as rejected by William Hill without any further adornment and certainly no upping of the price of the offer. The statement specifically states that the pre-conditions of the offer are that the William Hill board must provide a “unanimous and unqualified recommendation and the provision of hard irrevocable undertakings in favour of the transaction”.

This is unlikely to happen. It is probable the William Hill board consulted with its own major shareholders after it received the bid and one can imagine their collective reaction to the proposed ownership structure of the combination.

Inter-conditional to the William Hill offer being accepted, Rank and 888 would merge in an all-share deal that would give Rank a marginal majority of ‘new 888’ shares. The combination would then offer cash of 199p and 0.725 shares in ‘new 888’ to William Hill shareholders, leaving them with 47.5% of the new entity while 888 shareholders would control 25.7% and Rank would hold 29.6%.

The Rank/888 statement yesterday made much of the fact that its major shareholders – the Shakeds with 50% of 888 and Guoco at Rank with 56% - support of the deal, thus somehow “substantially mitigating execution risk”. Yet execution risk is written throughout the plan as detailed. To achieve the £100m of synergies that the company has identified, the new company would need to find £66m in digital integration savings, a further £19m in curtailed corporate and back office costs and £15m of savings that the company claims would come from leveraging the company’s increased scale in marketing negotiations.

At the same time, the new company would be attempting an integration that would be among the more complicated that have been attempted in the industry to date. Much has been made previously of the difficulties that will be encountered by Ladbrokes and Coral when they attempt to weld the two organisations together later this year, but that might have nothing on this one.

The Rank/888/William Hill combination would be, as the proposal makes clear, the largest multi-channel gambling operator by revenue and profit with a combination of multiple digital and retail brands across sports-betting, bingo, casino and poker. It would be a true behemoth with pro-forma 2015 revenues of £2.7bn and EBITDA of £500m. Henry Birch, current Rank chief executive, is penciled in to take the top job while his counterpart at 888 would be the chief operating officer.
There is no mention of who would take on the financial director role, but whoever got the job would face the prospect of managing the prospective circa £2.2bn debt pile, despite the promise in the plan for a “rapid deleveraging” towards a net debt to EBITDA ratio of between 2.5 and 3.5 times in 2018 (which in truth is a wide enough target).

Totally Gaming Says: Whether anyone will ever get to tackle this proposed debt pile is now in doubt. Speaking to the FT yesterday, Birch said the timing of the bid – coming a matter of weeks after William Hill had booted out its chief executive James Henderson – was “unfortunate as it looked as though we’d cobbled (it) together”. But he refused to comment on whether the pair would be putting together a renewed offer to entice the William Hill board. There is every indication, though, that it would need to be substantially improved for any discussions to take place. The ball is in 888 and Rank’s court.

 

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