If that much applies to a single company in need of a sense of purpose, then think how much more it applies when three companies occupying more or less the same patch of corporate ground reach that conclusion simultaneously.
Roughly speaking, this is the situation in the high-stakes corporate tussle between three of the UK’s best-known gambling companies – Rank (RNK) and 888 (888) on the one side and William Hill (WMH) on the other.
Sure, we can make the observation that William Hill has no wish to be blended into this three-into-one; that it was innocently minding its own business when Rank and 888 muscled in with an offer that, according to Hill’s bosses, is both unwelcome and derisory. Yet these three know each other well enough. Not only do Rank and 888 propose a merger in order to pursue their offer for Hill, but – more to the point – only 18 months ago William Hill was suggesting, then abandoning, its own merger with 888.
That they should be sniffing around each other is hardly surprising. After all, each occupies adjoining space in the gambling industry and it hardly takes a genius to imagine the benefits in pared-down costs and cross-selling opportunities that could materialise from squeezing the three into one.
The predatory team of Rank and 888 quantify these as £100m a year, which arise from such conventional measures as combining IT teams, using a common technology platform across the enlarged group and cutting central overheads. That amount would be worth having. On their own calculations, the Rank/888 duo value the 'capitalised value' of such savings at £940m, which would add 34 per cent to the implied £2.7bn market value of the three companies combined minus new debt; though that theoretical value top-up takes no account of the tax on the extra profit that the enlarged group might have to pay.
Yet if those synergy-enhancing measures sound too easy to catch, that may well be the case – because a merger of two companies so often encounters intractable problems when their IT operations are put together, one shudders to think what may happen when three are merged. Besides, close to home, both William Hill and Ladbrokes (LAD) ran into a marathon of difficulties as they struggled to make their digital gambling services fit for the early 21st century.
Yet all three companies involved have something to prove. None are in a position to boss the suggested transaction or to walk away from it. By dint of its growth record, ease with digital technology and its share-price performance, 888 is the leader, but, by stock-market value, it’s the smallest. Rank produces about twice the revenues of 888 – £700m against £357m – yet is encumbered by its Mecca bingo halls. Apart from having the most inappropriate name imaginable, this chain has static sales and profits. As a result, Rank can’t make profit margins close to 888’s or generate its consistent free cash flow.
As for William Hill, its medium-term share-price performance says it all. By a margin it has been the weakest of the three. In the five years to the start of July – when rumours began to buzz around the shares – the price had risen a pathetic 13 per cent. Even Rank, no longer a messy leisure conglomerate, saw its share price rise 91 per cent in that period, while 888’s price galloped away with 580 per cent growth.
Hill’s pedestrian price performance means its bosses can’t be so sniffy about a bid that would offer their shareholders some respite as well as lots of skin in the new game and new top managers to match. After all, the Rank/888 duo is offering a cash-and-shares mix that – with 888’s price at 208p – is worth 378p per Hill share. In contrast, its price languished at 257p on 1 July. True, that price had been as high as 410p in February. Then again, the price had topped £4 as far back as July 2013 before the ordinariness of Hill’s trading performance caught up with it. Earnings per share, which were almost 27p in 2008, have averaged 18p for the past seven years, a figure from which they have barely strayed.
Seen from another angle, the Rank/888 combo is offering 199p in cash – 80 per cent of the level of Hill’s pre-rumours price – plus a 48 per cent share in the enlarged group, which, on Hill’s own figures, would be worth 352p per share. That has to be worth serious consideration.
Sure, the hard-ball response of Hill’s bosses may eke out a few extra pence. Even so, the feeling is that their resistance is token more than real. Neither they nor the folk who run Rank and 888 may have a clear idea which way the gambling industry is heading, but it’s a good bet – as Ladbrokes and Coral have already wagered – that size will be better than independence.
