M Stanley lays boot into William Hill

M Stanley lays boot into William Hill

Tuesday, August 23, 2016 Posted by Andy McCarron
Broker suggests Hill board spurned a golden M&A opportunity

The investment bank that orchestrated the recent Rank and 888 consortium bid for William Hill has slapped a sell note out on the latter suggesting the board had rejected a bid that would have been worth up to £5 per share.

Analysts at Morgan Stanley have taken the opportunity of the failure of the bid to resume coverage of William Hill while also reiterating its buy advice for one of the failed bidders 888. The second consortium offer put a price-tag of 394p on William Hill shares but now M Stanley has put a price target on 300p on them, approximately 8% below their post-bid level of around 327p.

Morgan Stanley was the sole investment advisor cited in conjunction with the consortium offer with neither of the bidders’ house brokers being given a mention.

M Stanley analyst Vaughan Lewis said the William Hill board had rejected the offer in favour of an internal turnaround strategy which has the potential to be “protracted and risky”. He added: “We think rejection of the combination leaves William Hill in a challenging position, with a lengthy, complicated technology plan ahead of it in an increasingly challenging and competitive market, and with, as yet, no permanent chief executive.”

In addition, the company was facing potential market share losses both in online and retail, and in the latter the business was facing “elevated” regulatory risk to its machine state in particular.

In comparison, the sunlit uplands of the proposed merger would have delivered, according to Lewis, “best of breed technology and CRM platform, potentially allowing William Hill to close the gap to industry leaders”.

He added that the £5 share price target could have been reached via a combination of the £100m in planned cost synergies, potential revenue synergies and the value driven by the “strategic attraction of addressing William Hill’s technology and management gap”.

Lewis’ view stands in contrast to other analyst comment at the time of the breakdown of the bid which suggested the execution risk involved in the three-way deal outweighed the potential benefits to be accrued. When the initial offer was first proposed, David Jennings at Davy Stockbrokers in Dublin, characterized the bid as being “cash-poor, debt-heavy, strategically questionable and highly opportunistic in terms of timing”.

Jeffrey Harwood, analyst at Stifel, said in a note to clients late last week after the dust settled that the decision not to proceed was not a surprise. “Our view was a three-way transaction would be difficult to consummate for obvious reasons, particularly given the nature of the proposal and the lack of enthusiasm shown by William Hill for the transaction,” he added.

M Stanley was much more positive on the rejected consortium partner 888. Lewis concentrated on eight reasons why the stock was worth a buy, suggesting the shares offered an “attractive combination of strong growth, strong cash generation, improving fundamentals, reducing risks, significant options and a low valuation”.

He noted that 888 had delivered market-leading shareholder returns over the past five years, with a compound annual growth rate of 56% a year and delivering 85 cents of dividends over the period, equivalent to 31% of its current market cap. “With leading positions in regulated markets, strong proprietary technology, high cash generation and leading CRM capabilities, we think 888 is an attractive asset in a consolidating industry,” he concluded.

The downside comes from the competitive nature of the current market and the potential for 888 to be caught out in regulatory situation beyond their control. Lewis noted that at present circa a third of its total revenues come from unregulated and non-taxed jurisdictions.

Totally Gaming Says: Given M Stanley was gung-ho for the deal in the first place, it should be no surprise that it is now coming down harsh on William Hill for scuppering the merger before it even had a chance. However the fact there is disagreement among analysts also suggests that the bookmaker's vision for the future is rather muddled at the moment.

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