Echoes of bwin.party in William Hill-Amaya merger talks

11th October 2016 9:20 am GMT
William Hill
William Hill’s mooted reverse takeover of Amaya would create an industry leading gaming business which could achieve cost savings of around £100m according to analysts, but beyond that there is little to get excited about.The two companies have not gone into detail about any potential transaction and they may be sitting on the mother of all masterplans, but for the most part the initial reaction to the merger talks has been apathetic. Some say there are obvious benefits in allying the William Hill brand, arguably the UK’s biggest and most successful gambling brand, with that of PokerStars. It will create a formidable new industry giant, aiding William Hill in expanding its geographic reach. There are also those who see cross-selling opportunities between the two businesses. “Amaya has c.100m registered accounts, mostly poker players which suggest significant opportunities to cross sell William Hill’s casino and sports product,” notes Richard Stuber of Numis. He cautions, however: “Whether it will be able to is a moot point, as anecdotally, poker players have tended to limit themselves to a single product.” On the whole, the deal just does not sit right. This could be down to mega-merger exhaustion in the industry – we’ve seen it all in recent years – or it could be the bitter memory of the bwin.party merger. The boards of William Hill and Amaya have described the potential marriage as a “merger of equals”. Witnesses to the bwin.party car crash see it as two businesses looking for direction in one another.Gaming Intelligence has extensively documented William Hill’s woes. It lacks a coherent plan and following the departure of chief executive James Henderson and a raft of other executives, it appears to lack the management direction to steer it towards the right path. It faces further hardship in the form of new taxes. Free bet bonuses are to be taxed in the UK. New restrictions on fixed odds betting terminals (FOBTs) are expected. A new tax to replace the horseracing levy is on its way, while self-exclusion measures - which have already been blamed for a decline in profits - will continue to bite. And as GBGC’s Warwick Bartlett notes, the company’s market capitalisation has fallen by 25 per cent since March. Amaya, meanwhile, has been dogged by uncertainty all year. It has seen poker revenue decline as it exited grey markets in defence of its US licence and Canadian stock market listing. Its (now former) chief executive David Baazov was preparing a bid to acquire the business and take it private once again. An investigation linking him to insider trading effectively derailed his attempt and led to his removal as CEO and director. His replacement, Rafi Ashkenazi, was one of the most respected COOs in the industry but is yet to prove himself as chief executive of a publicly listed company. “[Being] number one in the global poker market is not as attractive as it once was,” analyst Simon French of Cenkos Leisure notes.It could be argued that by merging, management could extract value from the enlarged company. Baazov remains the largest shareholder at Amaya and could be keen to do a deal. French notes that “around £100m” of synergies have been mooted, although the make-up of this is not yet clear. The merged entity would also have a much more diversified footprint than before. But as one experienced executive notes, “the deal is remarkably similar to bwin and PartyGaming getting together when they had both lost direction”. There is no guarantee that it would do anything more than take two companies going in the wrong direction and replace them with a larger business still on the slide. There are a number of key issues here. First of all there is the small matter of regulated markets. French says that an estimated 75 per cent of merged revenue would come from locally licensed jurisdictions. This represents a decline of 13 per cent for William Hill’s online revenue. In its 2015 report William Hill estimated that around 88 per cent of revenue comes from regulated markets. It is unlikely that its institutional shareholders would welcome that additional level of risk. The Canadian market is another key issue, as Soko Advisors’ Paul Beattie notes. The country is a key market for PokerStars - reportedly in its top three territories - but William Hill was forced to withdraw its online services from the market after backing NYX in its acquisition of OpenBet. Canadian regulators are unlikely to allow a combined William Hill-PokerStars to own a stake in NYX-OpenBet while continuing their Canadian activities. This would leave the merged company in a difficult position. Either it has to write off a £100m investment or lose a major market. This is particularly pertinent considering Amaya’s heavy debt burden. Estimated at around £2.5bn, or around 3.8 times EBITDA, paying down this sum will be made more difficult by the loss of revenue from a major market. Increased taxes on FOBTs would further complicate the matter. Then there is the question of who will steer the merged business. William Hill is still without a CEO and Amaya’s Ashkenazi has only been in the role on a permanent basis since August. He may emerge as the man capable of overseeing such a merger but he has barely had time to get his feet under the table. William Hill is temporarily under the stewardship of CFO Phil Bowcock, who himself has only been with the company since August 2015, and the company’s board is yet to demonstrate the decisive leadership needed to get back on top. Add to this the current economic climate and the prospects of the deal look even weaker. “The timing for William Hill is not good,” GBGC chief executive Warwick Bartlett says. “Most FTSE companies have seen a bounce in share price due to the fall in GBP. This has not happened at William Hill. “Indeed William Hill has seen a 25 per cent drop in market cap since March 2016, GBP has also fallen 11 per cent for the same period. “Most companies buy foreign companies when their own currencies are riding high which enables a discount on the purchase price,” he explains. “This deal offers a merger of equals whereas in March 2016, William Hill, given a higher currency and market cap could have made an outright purchase.” Ultimately it is hard to see the strategic rationale behind the deal. “On balance we are not sure that William Hill's shareholders will find a 295 pence per share, nil premium, all-share merger proposal particularly compelling having seen the board turn down the 394p a share proposal from the Rank and 888 Holdings consortium less than two months ago,” French says. “We did not see much merit in the Rank deal, but it looks rather good now,” Bartlett adds. What the announcement of the merger talks may do is flush out other interested parties. GVC is developing something of a reputation for successful acquisitions and integration under the leadership of Kenneth Alexander. He has the track record to pull something like this off but whether the company has the appetite to take on more debt remains a question. “We firmly believe that further industry consolidation is likely, as the benefits of scale are overwhelming,” says Numis analyst Stuber. “Whether a William Hill and Amaya merger is the optimal combination, we remain to be convinced. “We continue to think that a William Hill combination with 888 may be a better strategic and lower risk fit.” Since confirmation of the merger talks at the close of business on Friday October 7th, shares in William Hill plc. (Co. Data) (LSE:WMH) have climbed around 3 per cent to 303.40 pence per share, 27 per cent below their 52-week high of 415.70 pence per share set on March 1st. Shares in Amaya Inc. (Co. Data) (TSX:AYA) closed in Toronto Friday up 9.14 per cent at CAD$23.41 per share before trading was suspended and the merger talks confirmed. The shares currently sit 29 per cent below their 52-week high of $32.99 per share set on October 8th, 2015.
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