ii view: 888 Holdings makes ‘transformational’ acquisition

Adding the William Hill brand to its online casino and poker franchises. Buy, sell or hold?

Acquisition of William Hill International

Chief executive Itai Pazner said:

"The acquisition of William Hill International is a transformational and hugely exciting moment in 888's history. This transaction will create one of the world's leading online betting and gaming groups with superior scale, exceptional brands, increased diversification, and a platform for strong growth.”

ii round-up:

Online gambling company 888 Holdings (LSE:888) has agreed to buy the non-US operations of the William Hill business including its 1,400 UK betting outlets for £2.2 billion from US owner Caesars Entertainment (NASDAQ:CZR). 

888 CEO described the deal as ‘transformational’ with it significantly ramping-up its exposure to sports betting, the world's largest and fastest growing online segment.

888 shares retreated by around 3% in post announcement trading having gain by more than 350% since pandemic induced market lows  in March 2020. Shares for rival Entain (LSE:ENT) and Ladbrokes owner have gained by more than 400% in that time. Shares for Betfair owner Flutter Entertainment (LSE:FLTR) have risen by around 130%. 

The combined William Hill and 888 businesses are expected to generate annual cost savings of at least £100 million. Along with potential revenue gains from an enhanced customer proposition and product offerings, the deal also creates sustainable leadership positions across its core UK, Italian and Spanish markets.

888 management sees the two companies’ strategies as complementary, being digitally led, customer focused, and committed to player protection and raising industry standards around safer gambling.

An auction for the non-US side of William Hill's business, which includes online operations across the UK and Europe, was initiated by Caesars Entertainment after it acquired the historic brand in April for £2.9 billion.

The William Hill acquisition by 888 is subject to both shareholder and regulatory approval. 

ii view:

Started in 1997, 888 Holdings today operates across the two divisions of Business to Consumer (B2C) under its 888 brands and Business to Business (B2B) through its Dragonfish division providing partners a platform from which to build an online gaming presence and monetise their own brands. The B2C division generates most of its sales, with casino products by far its biggest sales generator at close to 70% of 2020 revenues, poker and bingo at 12% and sports betting 14%. 

Geographically, the UK accounts for its biggest slug of sales at just over 40%, Italy as a sole nation is next at around 13%, with Europe, Middle East, and Africa (EMEA) making up for around one third; the US and Americas 12%; and the rest of the world around 1%.  

For investors, cautionary outlook comments accompanying recent first-half results to late June, and pending tougher comparatives in the fourth quarter, are worth remembering. So is an estimated forward price/earnings (PE) ratio above both the three- and 10-year averages, suggesting the shares are not obviously cheap. Increased government regulation also remains a concern. 

But the purchase of William Hill's operations gives it a famous brand name and expands its exposure to sports betting. It is also expected to enhance adjusted net earnings per share during its first full year following completion. No change in the dividend policy is expected, with a forecast income yield of close to 3% not derisory in an ongoing ultra-low interest rate environment. In all, and while some caution looks sensible, this latest deal should prove long-term rewarding. 

Positives: 

• A diversity of products and geographical locations
• Net cash position as at 30 June 2021 was $192.9 million

Negatives:

• Government concerns re gambling addiction
• Gaming taxes an easy target for financially stretched Covid-19 hit governments 

The average rating of stock market analysts:

Buy