Two men in a townhouse near London's Savile Row have thwarted a $5.5 billion transatlantic merger. The union of William Hill and Amaya, owner of PokerStars, has been scrapped in the face of opposition from Mads Gensmann and Edoardo Mercadante, founders of hedge fund Parvus Asset Management. It's a serious embarrassment for William Hill.
The U.K. group's chairman and interim CEO, Gareth Davis and Philip Bowcock, may rue the leak of their talks with Amaya earlier this month and want to think this denied them the chance to present a fully formed deal. But it's hard to see how that would have changed the outcome.
Parvus holds derivatives giving it economic exposure to 14 percent of William Hill. This could be converted into a voting stake, giving Gensmann and Mercadante a near veto on any transaction requiring shareholder approval.
Their opposition was based on a fundamental view that the market was severely overvaluing Amaya. So even though William Hill wasn't planning to offer a premium, Parvus reckoned it would be overpaying by 1.7 billion pounds ($2.1 billion). The hedge fund also thinks William Hill's own shares are undervalued by the market. Since this would have been the acquisition currency, it would have pushed the value destruction up to 2.6 billion pounds.
Getting to these numbers isn't easy. First, look at the gaming groups' valuations on an enterprise value to trailing Ebitda basis. William Hill trades on 9.2 times, while Amaya's on about 12 times. Or so it seems: Parvus then made some adjustments. It nudged up Amaya's enterprise value by adding a bunch of additional liabilities it thought the market was missing.
That inflated Amaya's enterprise multiple a few notches to nearer to 14. Finally, Parvus decided that Amaya didn't deserve any of this premium and should trade at 9.2, while William Hill deserves something higher.
It's brave to believe the market has missed so much. But markets are often wrong. And with a dominant position in the stock it hardly matters. Parvus calls the shots.
Where now for William Hill? It's slightly humiliating to be put back in your box by a hedge fund, especially one whose exposure is via derivatives. William Hill has to accept that it's not in a commanding position to negotiate deals right now. Priority one is to fill its vacant CEO seat and reassert its standalone strategy to give it a stronger hand in future discussions.
Failure as a buyer leaves William Hill more vulnerable to being bought. It rejected a joint cash and shares takeover proposal from 888 and Rank in the summer. That was easy to swat away because the premium was low and the bid was to be funded by gearing up the William Hill balance sheet -- which it could do by itself. Plus William Hill was talking to Amaya. Today, a reconfigured pitch from Rank and 888 -- with less leverage and more generous terms to William Hill -- might be harder to rebuff, as would a generous proposal from someone else.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
(Corrects street name spelling in first paragraph.)
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