It was only a matter of time. After a failed attempt to enter the industry M&A fray last year with a bid for 888, William Hill finds itself back in the mix. Only this time it is the hunted, rather than the hunter.
A consortium comprising Rank Group and 888 Holdings is plotting a bid for the struggling operator, worth an estimated £3bn.
The structure of the proposed deal remains unclear, but Rank and 888 talk about the “consolidation of [William Hill’s] complementary online and land-based operations.” This may suggest that they would split the business, with Rank bolstering its land-based offering with William Hill’s licensed betting office estate, and 888 taking on the online business. At the moment, however, we can only speculate.
William Hill’s initial response has hardly been enthusiastic. The operator’s board says that while it it will listen to any proposal that Rank and 888 may make, “it is not clear that a combination of William Hill with 888 and Rank will enhance William Hill’s strategic positioning or deliver superior value to William Hill’s strategy”.
Many observers are equally unsure.
“Look at the regulatory backdrop [in the industry]. It’s not clear at all,” says former William Hill chief executive Ralph Topping. “Is it the right time to do such a complicated transaction? I’m not so sure.
“A three-way deal is highly complicated, but it may make more sense to do a two-way deal.”
Topping suggests that some sort of deal with 888 may be more beneficial for William Hill, especially with the risk posed by new regulations on gaming machine stakes and prizes, which could negatively impact land-based operations.
Marketing mastery
A deal with 888 could provide William Hill the resources to address its online decline. This is one of William Hill’s most pressing issues. In its trading update for the first 17 weeks of the year, released in May, it revealed that online revenue was down 11 per cent. Gaming, which accounts for 52 per cent of online revenue, fell 4 per cent. The decline in sportsbook revenue was sharper, with the vertical dropping 17 per cent versus a year earlier.
Many suggest that addressing the performance in sports betting should be the key concern. However gaming, the largest source of online revenue, is also falling. Both need to be tackled fast, and 888 has the resources for this.
Not only does the company have a track record of turning around its own business, it has done so primarily using its own technology and marketing assets. Its proprietary technology platform powers a strong casino and poker offering which is regularly updated by a dedicated team.
More importantly it has a marketing team that has proved incredibly successful in promoting its casino, bingo and poker offerings. It goes beyond the traditional channels of TV and web advertising, using newspaper ads to promote new offers and taxis to promote its games.
In our previous analysis of William Hill’s struggles, we have highlighted the operator’s need to improve its marketing. 888 can do just that.
A lack of experience?
Simon French of Cenkos Leisure has argued that the acquisition is unlikely because “it is not immediately apparent that the skill set of 888 and Rank is suited to turning around either an online sportsbook or a Retail division about to be leapfrogged by Ladbrokes/Coral.”
“William Hill’s fundamental problem is its UK-facing online sportbsook and 888 has very little experience in that side of the business,” he told me.
Rank has struggled with sports betting previously, and the Kambi-powered 888sport is a minor part of the operator’s business. But bookmaking isn’t what it used to be. It is no longer as highly skilled a business as it once was. Trading is largely outsourced, so the bookmaker in its traditional sense is no more. What matters most today is marketing a good sports book effectively.
Another source points to Rank’s (mis)handling of its Blue Square sports betting business as evidence that it is not equipped to handle William Hill’s sportsbook operation. The brand was badly neglected over a number of years, until its customer database was sold off to Betfair for a cut-price £5m.
This was under Rank’s old management. Current chief executive Henry Birch is an experienced industry professional, who has put together a strong management team, many of whom worked for William Hill during its glory days. Having worked for a sportsbook-driven business, they have the experience to factor a sports betting product into Rank’s portfolio.
Results indicate that Rank is also capable of effectively marketing its online and land-based brands. While results for the 19-week period ended May 8th revealed only 2 per cent growth in revenue across the business, the full-year results for its 2014-15 financial year revealed major advances in each channel.
In that period, combined revenue from Grosvenor Casinos was up 57 per cent, with Mecca online and land-based revenue climbing 37 per cent. In contrast, William Hill saw land-based revenue fall 2.4 per cent in its 2015 financial year, albeit with a different product portfolio.
There is scope to cross-sell between the casino and bingo venues and licensed betting offices (LBOs). Again, it comes down to the fact that operating a sports betting business is centred around marketing the offering. If Rank can do so with bingo and casino, why not with sports?
Regulatory headwinds
One consultant, like Topping, queries the wisdom of acquiring a land-based business in the current business climate.
“Is it worth having a retail business in the market today? There is most likely more taxes ahead for operators,” they suggest. This could be particularly true for high stakes gaming machines.
The benefits of Rank acquiring William Hill’s retail operations are less apparent than those gained through 888 taking charge of online, but there is still an upside.
An omni-channel betting, casino, bingo and iGaming offering would be one, cross-selling between William Hill, Grosvenor, Mecca and 888 brands.
Then there is the strength of 888’s in-house game development capabilities. Having seen land-based games repurposed for online in the past few years, that product flow is now reversing with online portfolios making their way onto retail machines.
Should 888 begin to repurpose its content for the retail sector, it could generate significant revenue from games not available via any other operator. And with no need to share revenue with third-party providers, this could boost the profitability of William Hill’s retail division, protecting the operator from the impact of any reduction in machine stakes and prizes.
“An investment bank deal”
Looking forward, price will remain an issue. The deal could live or die on the premium Rank and 888 are prepared to pay for the business, and William Hill is not going cheap. News of the potential acquisition has boosted its share price, helping it recover from its post-profit warning slump.
With a price of around £3bn being mooted, it would certainly involve taking on a lot of debt. However, borrowing today is cheaper than it has ever been and it is expected to get cheaper with more rate cuts forecast for the near future. The risk of negative interest rates could also become a factor, with Natwest, a division of publicly-owned RBS, becoming the first UK bank this week to change the terms of its business banking accounts to allow it to charge for deposits.
Even as things stand, one analyst has described the mooted bid as “an investment bank deal,” pushed on Rank and 888 by Morgan Stanley, which is advising each operator in the talks. It has been said that this is not a board-led bid.
In light of this, what are the chances of a new bidder emerging?
Anytime you talk about acquisitions someone suggests Playtech, and I would not be surprised to hear that name pop up during this process. The transaction currently under consideration could reduce William Hill’s dependence on Playtech, and a bid by the supplier could safeguard its revenue from a major customer. But how would Ladbrokes-Coral react to this, and would William Hill entertain an offer from Playtech?
And what of private equity? Sky Betting & Gaming has a very acquisitive new owner behind it in CVC Capital Partners. Might it decide that it could accelerate growth with a major deal?
The tepid response from the William Hill board suggests that the operator doesn’t think it needs any outside help to reinvigorate its business. If and when it decides that it does, it could do worse than team up with Rank and 888, or even that supplier they have been so desperate to distance themselves from.