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888 spins the wheel on William Hill

Company arranges £2.1bn of debt to fund acquisition
888 spins the wheel on William Hill

• 888 will take on William Hill's 1,300-strong chain of shops

• Combination will create £100m of synergies, company says

888 Holdings (888), the online betting business, is placing a large wager of its own on its ability to become an industry leader with a £2.2 billion bid for William Hill’s European operations.

The deal would provide an early pay-out for Las Vegas-based casino operator Caesars Entertainment (CZR: US). It would get to recoup most of the £2.9bn it staked on William Hill as well as keeping the US operations it wanted to facilitate its push into sports betting.

888’s bid looks like more of a high-stakes affair.

It is effectively a reverse takeover, which on completion will allow it to earn 86 per cent of its revenue from regulated markets. Its market share will also grow to 12 per cent of the UK, over 10 per cent of the fast-growing  Spanish market and will strengthen its position in Italy.

Chief executive Itai Pazner described the deal as a “perfect combination” that will deliver significant shareholder value. The company expressed confidence in its ability to generate £100m of synergies by 2025, through lower payment processing fees, improved marketing spend, consolidating some corporate and support functions and achieving £15m of capex spend. It also forecasts a 50 per cent uplift in earnings per share in the first full year following completion.

All this comes at a high price. The £2.2bn price tag equates to 9.2-times “normalised” 2020 earnings for William Hill’s European arm, but is about 19-times last year’s actual earnings – admittedly from a period when much of its estate was closed for months on end due to Covid-19 restrictions. Factoring in a 40 per cent first-half uplift in the acquired business’s sales and assuming it delivers its identified synergies, the price falls to 6x earnings, CFO Yariv Dafna said on an investors’ call.

This is a big assumption to make, though, and the shares closed 3 per cent lower at 389p following the announcement.

888, which had $161.5m (£118m) of equity on its balance sheet at the end of June, is taking on £2.1bn of debt to fund the deal, including a £500m bridging loan that it intends to replace via a subsequent capital raise. Even after tapping shareholders, its pro forma net leverage will fall to about 4x.

It is also taking on a high street business with more than 1,400 shops and 10,000 employees, which adds a lot of operational risk at a time when William Hill’s US and international arms are still being separated out.

On top of this, it needs to jump through various hoops to gain approval, including from relevant gaming and anti-trust authorities.

Last IC view: Hold, 420p, 01 Sep 2021