Long Odds for William Hill

Fiddly deal mechanics and fundamental questions are big challenges

Two U.K. gaming groups want to buy William Hill -- a rival nearly twice their combined size. If they are to succeed, Rank and 888 will need to pull every lever, and have luck on their side too.

Shares in William Hill closed at 313.6 pence on July 22, valuing the group at 2.7 billion pounds ($3.6 billion). Imagine a takeover bid at 416 pence per share. This would give shareholders an exit at William Hill's 52-week high and would represent a premium of 33 percent -- standard, if not especially generous. The snag is Rank and 888 have a combined market capitalization of just 1.76 billion pounds.

Hey, Big Spender

William Hill's market capitalization is bigger than joint suitors Rank and 888 combined

Source: Bloomberg

Financing an all-cash deal would be very difficult. Scrunch all three groups together and the new entity would have forecast Ebitda of around 550 million pounds and net debt of less than that. To raise the 3.6 billion pound purchase price in debt would mean taking leverage from a low level to one that stock market investors likely wouldn't tolerate in such a volatile industry -- perhaps more than double the 3 times Ebitda that's their normal threshold.

So 888's and Rank's management would need to turn to their own shareholders to raise equity capital. Their controlling investors -- the investment vehicle of Malaysian billionaire Quek Leng Chan currently owns 56 percent of Rank, while 888's biggest holder remains the founding family -- may nevertheless be supportive. But it's an open question whether they'll both bite.

One way of getting around this would be a complicated three-way merger with no cash changing hands. For example, Rank and 888 could combine and then offer shares in the new company to William Hill holders. This could be supplemented by some cash.

Lucky Strike

Rank and 888 mull a deal for William Hill just as the target's shareholders may be losing patience

Source: Bloomberg

This approach might hold some appeal given that it would create an opportunity for some William Hill investors to bow out.

But even if the mechanics of such a fiddly deal could be sorted out, the investment story of the new entity isn't obviously attractive.

It wasn't all that long ago that William Hill tried -- and failed -- to buy 888 as a way of fast-tracking its online gaming offering. But since that approach early last year, it's developed its digital presence organically, so the logic of teaming up with 888 is no longer as interesting. As for what Rank brings, its bingo halls and casino operations don't obviously boost William Hill's digital strategy. 

William Hill's shares were up only around 7 percent on Monday's report. That's a modest jump for a takeover situation. Recent turmoil, including the departure of the chief executive, has left investors looking for some good news.

Investors are right to be skeptical this ambitious deal will actually materialize.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Chris Hughes in London at chughes89@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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