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William Hill - Operating profits down despite a strong Euros

George Salmon | 5 August 2016 | A A A
William Hill - Operating profits down despite a strong Euros

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Bid approach:

On 25 July, William Hill announced that it had received a "highly preliminary" approach from online gambling group 888 Holdings and casino operator Rank Group. At the time, William Hill said that although it would consider any proposal, it was "not clear that a combination of William Hill with 888 and Rank will enhance William Hill's strategic positioning". On the 18th August 888 and Rank announced that they did not intend to make a firm offer, after both the initial and a revised offer were rejected. The revised offer valued William Hill at 394p a share, including a significant share component.

On 18 August 888 and Rank announced that they did not intend to make a firm offer, after both the initial and a revised offer were rejected. The revised offer valued William Hill at 394p a share, including a significant share component.

10 August 2016:William Hill have this morning released interim results for the period to 30 June 2016.

The group remain on track to meet the revised full year operating profit guidance of £260m-280m, which was lowered in March . The shares were level in early trading.

Net revenue nudges up 1% to £814.4m, but operating profits are down by 16% to £131.1m.

A strong European Championships generated a total £36m gross win, which has mitigated the impact of a loss-making Cheltenham festival.

Amounts wagered in the online Sportsbook declined by 1%, while gross win margins moved up 0.1ppt to 7.3%. This resulted in a 3% fall in overall online net revenue, with gaming declining 6% as time-out/automatic self-exclusions continue to have an impact. Online operating profit fell 33% to £43.4m, as costs rose 9%.

Improvements such as 'Cash In My Bet' have been introduced, and the user experience of the mobile website and app (which accounts for 70% of Sportsbook revenue) has been refreshed.

Despite a 4% decline in amounts wagered, over the counter (OTC) net revenue increased by 2% to £225m, as gross win margins improved by 1.1ppts to 19%. Overall, operating profit from the Retail division increased by 4% to £94.3m, boosted by 6% growth in gaming machine net revenues.

William Hill continue to roll-out self-service betting terminals (SSBTs), adding 800 in the period, 300 more than targeted. Another 1,200 are planned in the second half.

Interim CEO Philip Bowcock highlighted the need for William Hill to diversify, expanding digitally and internationally, and believes that the group has taken considerable steps forward in executing online improvements but that there is still a way to go. Other priorities include leveraging technological improvements across the business and a more focused approach to international growth.

The interim dividend is maintained at 4.1p per share.

Bid approach:

On 25 July, William Hill announced that it had received a "highly preliminary" approach from online gambling group 888 Holdings and casino operator Rank Group. At the time, William Hill said that, although it would consider any proposal, it was "not clear that a combination of William Hill with 888 and Rank will enhance William Hill's strategic positioning".

Commenting on the approach, Rank and 888 said that they saw "significant industrial logic in the combination" which would consolidate the three group's online and land-based operations while delivering "substantial revenue and cost synergies" as well as "benefits of economies of scale".

No further details of any potential offer have been released, and the Consortium must confirm whether a formal offer will, or will not, be made by the 21 August.

Our view:

The proposal to merge William Hill with 888 Holdings and The Rank Group follows a rush of consolidation activity in the gaming sector, both on and off the high street. Ladbrokes is in the process of merging with Coral, while 888 Holdings had their attempts to acquire Bwin.party gazumped at the last minute by rival GVC Holdings. Operators are seeking synergies and scale in the face of growing regulatory costs and increasing taxes.

Although it isn't clear that Rank Group's Mecca Bingo and Grosvenor Casino assets fit easily within the group, the bidders probably suspect that the deal's potential to aid William Hill's struggling online division could provide some attraction. After all, 888 have plenty of online expertise and Rank CEO Henry Birch successfully headed up William Hill's online business from 2008 to 2012.

However, William Hill's response was frosty, and should Rank and 888 decide to roll the dice, we can't help but feel that an offer would need to be very good to draw a friendly response from William Hill.

The recent purchase of Grand Parade for £13.6m, together with the strategic plans detailed in half year results, makes us think that William Hill is looking to address the shortcomings of its online division itself.

If a firm offer is made then all bets are off. But in the meantime, the group continues to struggle with its problems in the online division and the declining profitability of the Australian business, now contributing just £3.9m to group operating profit.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.