Caesar's Entertainment is in advanced talks with William Hill over a potential £2.9bn cash takeover offer. The deal would see William Hill shareholders receive 272p per share, a 25% premium prior to the closing price on 24 September - the last business day before the start of the official offer period and prior to any announcements.
At this level, William Hill's board has indicated it would recommend the deal to shareholders.
Caesar's is finalising its due diligence and a further announcement will be made if a firm offer is made. If the deal is approved by William Hill Shareholders and the regulators, the deal is expected to close in the second half of 2021.
The announcement follows a brief statement from William Hill on 25 September 2020 confirming it had received cash offers from alternative asset manager, Apollo, and Caesars.
William Hill shares fell 12% on the morning of the announcement, having jumped by over a third on the previous Friday afternoon.
William Hill is well acquainted with takeovers but it's equally familiar in fighting them off.
While we think the current deal on the table from Caesar's looks like a good offer for William Hill shareholders, it's important to bear in mind the group's history of rejection of big brands and big price tags.
As things stand we can see logic in Caesars offer.
In 2018 sports betting in the US became legal again and as more and more states allow it, it's expected to become the largest regulated market in the world. And with all the big names racing to gain market share, with just under 30%, William Hill's the largest and most established player.
A tie up it would cement Caesars a serious contender - combining Caesar's land based casinos with sports betting, and online gaming. The group already owns 20% of William Hill US, through their joint venture and the existing agreement says that if William Hill is acquired by someone else, Caesars has the right to cut off the coveted US market access too. Which adds pressure to the direction of travel.
William Hill's board thinks the deal is good enough to recommend. But it's by no means straightforward and that means there could be further deal making to come.
Price may be the sticking point. The current offer values William Hill at 25% premium. But if it goes through Caesar's will look for "suitable partners or owners" for the group's non-US segments or 90% of last year's group revenues. An attractive offer for such a small part of the business, is an odd one. And suggests that that US segment could be more valuable than Caesar's current estimates. The result could likely be a rejection by William Hill shareholders and further bids.
Regulation could a second point of contention, particularly when it comes to the fate of the UK business.
Until any deal is signed the William Hill we knew before remains. The group's licking some wounds from the pandemic, but the balance sheet is in better health thanks to funds from the £224m share placing. The UK retail business remains challenged and the online proposition lags behind peers.
Ultimately these challenges may be someone else's soon. And with the current share price currently just above Caesar's proposed takeover price that suggests the market thinks a deal could be on the table. Given this we'd expect some investors will be locking in their gains now.
Half Year Results (5 August 2020)
Underlying net revenue fell 32% to £554.4m in the first six months of the year. That reflects disruption to sporting events during lockdown, and the temporary closure of retail shops. However, good cost control and growth online meant operating profits of £11.8m were better than expected, but this was still lower than £76.2m last year.
William Hill said it is "encouraged" by early trading since sports have resumed, shops reopened, and the online business continues to perform well. However, the group is still unable to provide any guidance for the full year.
Online net revenues of £369.3m were 2% lower than year, reflecting the lack of sports events and bets over lockdown, offset some way by higher gaming revenues, particularly overseas. Sports revenues are benefitting from the return of the football calendar. Following last year's acquisition of Mr Green international revenues are now 39% of the online total. Underlying operating profits were up 3% at £55.7m reflecting good cost control. William Hill implemented the credit card ban in April but don't yet know the impact.
UK Retail like-for-like revenues (which excludes the 713 shops closed as a result of the £2 stake limit) fell 49% to £146.9m, reflecting closures over lockdown. The division made an underlying operating loss of £13.5m, compared to a profit of £42.7m last year. With government restrictions lifted on 15 June, 87% of the store estate is now open. William Hill's base case scenario is for footfall to return to 80% of pre coronavirus levels, and the group recognised a non-cash £81.9m charge in the period as it wrote down the value of its retail stores. It said 119 stores will remain permanently closed.
Trading since reopening is said to have been better than expected but longer-term trends are still uncertain. William Hill plans to merge the UK Online and Retail divisions.
US net revenue was £550.0m down 30% and the group made an operating loss of £8.1m compared to profit of £3.4m last year. Like the UK, the declines reflect lack of sports over lockdown. As sports betting is become increasingly legalised in states William Hill is now operating through retail and a growing online presence in 12 states. This is expected to raise to 14 by the end of the year. The group now has access to 25 US states in total, having recently got exclusive rights to Caesars Entertainments' sports book.
Lower profits together with capital expenditure of £46.7m (down from £60.3m last year) meant free cash was negative £9.7m. However, improved trading in the second half so far, means the group has returned to generating free cash.
Net debt reduced by £196.2m since the end of the last financial year, to £339.5m and is equivalent to 2.1 times cash profits. The reduction reflects the proceeds from the share placing earlier this year.
In light of a more positive trading environment, William Hill plans to repay the £24.5m in Furlough Funds received from the government, and will not be participating in the job retention bonus scheme.
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