Why gambling is the new hot sector to own 

Takeovers and big profits have forced investors to take notice of this once struggling industry.

A £2.9 billion takeover deal for William Hill (LSE:WMH) was followed today by a 25% surge in the value of 888 Holdings (LSE:888) as the hot streak for investors in the gambling sector continued.

The casino, poker and bingo firm said average daily revenues were running 56% ahead of last year as 888 benefits from the acquisition of customers during lockdowns earlier in 2020. Underlying earnings are now set to be significantly ahead of its previous expectations, triggering the rise in the company's share price to a level last seen two years ago.

Good progress was also reported in the United States, where revenues increased 90% in today's interim results following strong growth in the consumer-facing New Jersey market.

The group sees “potentially significant” medium and long-term opportunities in the US, but so far hasn't participated in the consolidation seen since sports betting was legalised in 2018.

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The next industry M&A looks set to involve William Hill, whose growing presence across the Atlantic has taken it to the brink of a takeover by Las Vegas casino giant Caesars Entertainment.

William Hill's board today recommended a 272p a share offer by Caesars, representing a 57% premium to the share price at the start of September and a far cry from the 36p seen in the depths of the lockdown, when no sporting fixtures took place.

However, some analysts in the City argue that William Hill's prospects in the United States are so promising that shareholders should be demanding a price above 300p a share.

Caesars already operates a US joint venture with William Hill under which the UK firm is able to run online sports betting operations through Caesars' market. The existence of that tie-up is expected to frustrate efforts by private equity firm Apollo to table a rival offer.

Confirmation of a deal between William Hill and Caesars is likely to spark further M&A activity, as the US firm has already indicated it has no interest in running William Hill's non-US operations. This has raised speculation that 888 may resurrect its 2016 attempt to buy William Hill's European online business.

Analysts at Peel Hunt said there was material upside in the 888 Holdings share price, based on its in-house sports betting technology platform and potential for a “killer deal” in the US.

They added: “We continue to believe that 888 aspires to a strategic US deal. But, while we wait, it is clearly investing time and money in a self-help strategy.”

Peel Hunt increased its price target by 50p to 300p, which compares with 261p in the wake of today's well-received interim results. Stifel also noted that 888's price/earnings multiple of 14.8x was at a considerable discount to more US-focused peers.

Stifel said: “Given the strength of current trading and the potential value of its assets in a consolidating market we anticipate both a rating and an earnings driven increase in the share price.”

Today's share price jump was also driven by the payment of a double dividend, with the interim award of 3.2 cents a share supplemented by a one-off 2.8 cents a share to reflect the strong performance in the first half and confidence in the outlook. Net cash generated from operating activities jumped 120% to US$94.2 million in the half-year period.

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Group revenues rose by 37% to US$379.1 million as particularly strong performances in casino and poker — up 48% and 56% respectively — offset a 1% decline in sports revenues after the pandemic led to the cancellation of sporting fixtures between March and June.

The number of first-time depositors increased 49% year-on-year as the lockdown period encouraged more consumers to use 888's online services. The company said it had taken steps to increase its vigilance on safe gambling and preventing gambling-related harm.

Shares in Paddy Power owner Flutter Entertainment (LSE:FLTR) and Ladbrokes rival GVC Holdings (LSE:GVC) have also risen sharply since March, although both stocks were trading about 1% lower today.