William Hill merger bid has mountain to climb for 888 and Rank

William Hill merger bid has mountain to climb for 888 and Rank

Wednesday, August 10, 2016 Posted by Andy McCarron
Ball now in Rank and 888’s court as William Hill rejects ‘underwhelming’ offer

As corporate ‘dear John’ letters go, William Hill’s response to the joint 888 and Rank bid for the company was as dismissive as they come. Pointing out that the offer price of 365p a share represented a premium of only 16% to the share price on the last trading day ahead of the bid announcement news on 22 July, William Hill said the offer “substantially undervalues” the company.

To press home the point, William Hill added that it does not believe the proposed deal would enhance William hill’s “strategic positioning or deliver superior value” for its shareholders. Taking into account assumed debt leverage of the proposed combination – at least £2.2bn according to William Hill – it said the merged entity would entail “substantial risk” for its own shareholders.

Chairman Gareth Davies rounded off the case for the defence by saying the deal was “highly opportunistic and does not represent the inherent value of the business”.

Although there was no official word from either 888 or Rank, those following Eyal Shaked, scion of one of 888’s founders and whose family still retains a near 50% share ownership of the company, on social media were left in no doubt about how he had taken the news. In a brief flurry of tweets, he first suggested that “pure ego made William Hill reject Rank and 888 £3.16bn bid and that will be their downfall” before alluding to previous occasion that discussions between 888 and William Hill broke down in early 2015 by tweeting “last year it was ‘key shareholder opting for higher returns’, now it’s an opportunistic offer”.

This fit of pique refers to the reason cited by 888 itself for the earlier breakdown when it said in its statement to the stock exchange that it had not been possible to agree on the 200p a share offer “due to a significant difference of opinion on value with a key stakeholder”.

That “key shareholder” is of course the Shaked family but his reaction to this rejection will likely have repercussions, just not in the way he intended. 888 and Rank have indeed pounced at a moment of weakness for William Hill. The company has arguably lost its mojo online, and its chief executive into the bargain, and it is now commonly viewed as having fallen behind the pack when it comes to the current M&A frenzy.

But William Hill will no doubt be busy right now pointing out to its own relatively open shareholder base – including institutional names such as Schroder, Artemis, and UBS - the dangers of getting into bed with these particular closely-held entities. While 888 has the Shaked family with 48% of the shareholding, Rank has Malaysian leisure conglomerate Guoco with 56% of the total shareholding.

Dave Jennings, analyst at Davy Stockbrokers in Dublin, advised William Hill shareholders to stay the course with the company as it is rather than make the leap into the unknown with the consortium.

“William Hill shareholders should… await appointment of a (hopefully) experienced chief executive. If the board focuses less on near-term buy-backs and more on strengthening its balance sheet and executing on improving efficiency in its online businesses, the group should be better positioned to participate in sector M&A from a position of strength in a couple of years’ time.”

This might be an optimistic timeline. We have yet to hear from either 888 or Rank officially, rather than through social media, but the pair now have three options, according to Gavin Kelleher at Goodbody.

First, they can increase the offer (“although we would note the current deal structure would look slightly stretched to some with four times net debt/EBITDA”); Rank and 888 can go hostile by going over the heads of the board (but as mentioned above they might not find all that receptive an audience); or the pair can walk away.

Simon French at Cenkos suggested 888 and Rank’s case may be furthered if and when it publishes details of the proposal, and particularly when it justifies the “the significant industrial logic it sees in a three-way merger which the market is struggling to comprehend”.

“This could pave the way for a revised proposal,” he added. “For now it is hard to see anything other than William Hill remaining an independent entity, even though problems remain, particularly in its UK-facing sportsbook.”

Totally Gaming Says: The question is how long that ‘for now’ lasts. As mentioned previously, William Hill is now definitely in play and will be the subject of much speculation in the coming weeks. Within that realm of speculation and rumour may lie the germ of the deal that William Hill and its board might accept. Whether that comes from Rank or 888, separately or together, is maybe more doubtful.

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