Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The controlling shareholders in Rank and 888 have thrown their weight behind an ambitious plan for a three-way merger with William Hill. They would have influential holdings in so-called "Megabet" if the combination actually happened. William Hill investors should be concerned about being relegated to minority status. An alternative deal structure would provide a remedy.

Under Rank and 888's current -- rejected -- proposal, trusts belonging to 888's founding family would own 13 percent of the enlarged group. Malaysia-based tycoon Quek Leng Chan, who has a controlling stake in Rank, would own 17 percent.

No problem? Perhaps. The holdings are separate entities and the 888 family trusts represent several individuals who may have diverging views. Even combined, the holdings would be below the 30 percent threshold considered to amount to a controlling force.

Opportunistic Strike
Rank and 888 targeted William Hill just after it said its CEO was leaving amid share-price weakness

But it's not hard to imagine situations where other shareholders were potentially disadvantaged, such as a future takeover of Megabet itself. Big holders in bid targets often have particular interests. They may want to cash out an illiquid stake, making them more amenable to a bad price. Or they may be averse to a cash offer that would crystallize a capital gain, as in AB InBev's offer for SABMiller.

This is only an issue here because Rank and 888 want William Hill shareholders to sell more than half their holdings for cash. This has the effect of minimizing dilution for the bidders' investors. 

A deal with more stock and less cash would kill William Hill's objections about the debt needed to fund that cash payment. The target's warnings on the increased cost of this leverage may be overdone: while junk-rated, it might be able to borrow at investment-grade rates because of its blue-chip status. But leverage would be a risky 4.1 times 2016 combined Ebitda, and Megabet would be vulnerable to shocks until debt was paid down.

Of course, re-weighting the stock element of the proposal would mean the 888 family owners and Rank's tycoon sharing more of the upside with William Hill investors. The current structure sees the target's shareholders put in 61 percent of the assets by market cap for a 45 percent stake and a sack of cash. At the outset, that means they get a small premium. But what happens beyond that? Their smaller stake means less of a share of future winnings. This would be a sore point if any deal became a huge success.

Sharing The Winnings
Rank and 888's proposed ownership split in a merger with William Hill would give them 55% of the upside
Source: Rank, 888 announcement

Indeed, it's pretty clear that Rank and 888 are excited by the combination's cross-selling opportunities. They haven't said what those are worth -- they've only detailed 100 million pounds ($130 million) of annual cost savings. Assume the increased revenue doubles the yearly profit boost from the tie-up to 200 million pounds, or 164 million pounds after tax, by 2020. Stock investors might value this earnings uplift a lot, pushing the shares much higher. Rank and 888 would get an outsized share of this despite their smaller starting contribution.

If this three-way tie-up is as good as its 888 and Rank claim, they can afford to divvy up the proceeds more evenly, while providing more reassuring governance and a more stable capital structure. Their own investors need to agree, but without a fairer share of the spoils the winner's enclosure is a distant dream.

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

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Chris Hughes in London at

To contact the editor responsible for this story:
James Boxell at