Parvus deals blow to William Hill on Amaya deal

Parvus deals blow to William Hill on Amaya deal

Monday, October 17, 2016 Posted by Andy McCarron
Largest shareholder goes public with “strategic” concerns

William Hill’s hopes of convincing its shareholders to accept a deal to merge with PokerStars owner Amaya suffered a blow late last week when top shareholder Parvus Asset Management issued an open letter which called into question the premise of any agreement.

The letter was issued after representatives from hedge fund met with William Hill’s current management team of chairman Gareth Davis and interim chief executive Philip Bowcock earlier in the week to discuss William Hill’s plans. Parvus is the beneficial owner of over 14% of William Hill.

A formal deal is yet to be agreed, but with such a public show of disagreement from a major shareholder means the company might struggle to gain approval for the proposed £4.6bn merger.

According to the letter from Parvus co-founders Mads Eg Gensman and Edoardo Mercadante, the proposed takeover “has limited strategic logic and would destroy shareholder value”. It went on to say that it will actively oppose the deal and urged William Hill’s board to “consider all alternative options for maximising value for William Hill shareholders”.

The duo takes particular issue with the future of online poker and say it is the “least attractive” segment of online gambling. “It is a mature, if not structurally declining, revenue stream,” the letter states. “Poker players take part in a game of skill against each other, making it inherently difficult to sell them other online gambling products where the house ultimately wins. Perversely, casino products often end up cannibalising the poker business. Therefore, the proposed reverse takeover would only offer limited revenue synergies and would weaken William Hill’s strategic position in the long-term.”

The specifics around the merger are yet to be agreed, but Parvus takes issue with some of the baseline valuations. In particular, it highlights that William Hill enjoys higher cash-flow generation than Amaya and that the UK-listed firm is effectively proposing a value transfer equivalent to £1.7bn, based on Parvus estimates for the gap in the enterprise value/EBITDA ratios for the two companies.

In a parting shot, Parvus makes the claim that William Hill is “inconsistently” assessing merger benefits for shareholders having previously rejected the recent bid from the Rank/888 consortium. It points out that this is similarly a “complex, transformational deal”, that the deal is being proposed at a share price level of circa 300p, far below the level of the consortium bid of 394p a share, and that this deal will similarly involve substantial debt courtesy of Amaya’s debt load of £2.8bn.

Simon French, analyst at Cenkos, said William Hill had suffered a setback with the publication of the letter and what it portends for the possibility of gaining shareholder approval for the deal as and when it is actually agreed. He added that though the contents of the letter constituted a “damning critique”, the call for a sale of the company would be badly timed.

“In our view, given the impending review of stakes and prizes which we think, on balance, is likely to lead to a reduction in the maximum stake for B2 gaming machine content (FOBTs), now is not the optimum time to consider such a move but agree that the group's M&A activity has been skittish as the group has found itself increasingly boxed into a corner,” he wrote.

Totally Gaming says: This latest example of large-scale M&A talks has gotten ugly very quickly. Accusations of the sort being thrown out by Parvus make it difficult, though not impossible, for William Hill and Amaya to come up with a deal which will be attractive to all parties. That said, there is much more to the William Hill/Amaya combination than Parvus suggests – it is now up to the negotiators on both sides to craft an agreement that better articulates the potential growth story.

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