Deals

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Time to rip up those betting slips. Megabet's a bust.

888 and Rank said on Thursday they would walk away from their audacious plan to merge and then immediately take over William Hill, their vastly bigger rival.

William Hill was right to reject their overtures -- even after a raised offer its shareholders were getting less than half of the combined company, as well as some cash. That's inadequate given that they'd have to contribute more than 60 percent of the assets, based on the three companies' market capitalizations.

As Gadfly has argued, if Megabet really was going to romp home, then William Hill shareholders deserved a bigger share of the winnings.

888 and Rank were in a bit of a bind. They would have had to offer over 400 pence per share for the deal to win over the company.

That would have meant increasing the stock component, which would have diluted their major shareholders. Alternatively, they would have had to increase the cash element, which would have likely raised leverage to challenging levels. William Hill had already taken issue with the amount of borrowing that the combined company would have had to take on, particularly in an industry vulnerable to sudden regulatory shocks.

The two companies' shares rose on their decision to walk away, showing that even their investors weren't that keen.

Phew
Shares in Rank and 888 ticked up after they pulled their joint bid for William Hill
Source: Bloomberg
Intraday times are displayed in ET.

But William Hill now has to prove that it can do better alone than as part of betting's new behemoth on the block.

It said on Thursday that it had a good start to the year, and full year operating profit would be at the top end of the range of analysts' forecasts of between 260 million pounds and 280 million pounds. That's probably why the shares fell just 1.5 percent on Thursday, and closed at 303 pence -- suggesting that investors had placed long odds on the would-be buyers producing a big bump in the price.

Long(ish) Climb Back
William Hill must work to return shares to Rank and 888's offer price, but it's not a million miles away
Source: Bloomberg

But it's not without its challenges. It must first find a new chief executive, after it parted company with James Henderson just a month ago.

It then has to turn around its online business, where a poor performance was one of the factors behind a profit warning in March, and improve its performance in Australia. Meanwhile, it must manage its portfolio of more than 2,000 high-street betting shops, a business that looks like it's matured.

Getting to the 352 pence that William Hill said 888 and Rank's most recent approach was worth doesn't look too challenging as they weren't that far from that level to begin with, even after the profit warning. But getting to the 394 pence that 888 and Rank put on the revised offer is more challenging. 

All is not lost for William Hill investors. If the company can't return to that lofty level on its own steam, there's always a chance of barbarians raiding the betting shop: a private equity bidder could enter the fray.

But if William Hill stays independent, and does manage to turn itself around, at least it will be a case of winner takes all.

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

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

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