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William Hill - takeover by Caesar's recommended

Emilie Stevens, Equity Analyst | 30 September 2020 | A A A
William Hill - takeover by Caesar's recommended

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The boards of William Hill and Caesars have reached an agreement on the £2.9bn cash acquisition of William Hill, announced earlier in the week.

William Hill's directors recommend "unanimously and unconditionally" that shareholders should vote in favour of Caesar's acquisition at 272p per share.

To go through the deals needs 75% shareholder approval and further details, including when the vote will be, are expected in due course.

William Hill shares rose 1% on the news.

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Our view

William Hill is well acquainted with takeovers but this could be the last hoorah - with the board recommending Caesar's £2.9bn acquisition on the basis that it's 'the best option for William Hill shareholders'.

The deal now awaits shareholder and regulatory approval but 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.

But while William Hill's board thinks the deal is good enough. It's by no means straightforward and could mean there is further deal making to come.

The current offer values William Hill at 25% premium prior to any announcements. 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 be 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 look likely to be someone else's soon. And with the share price currently just above Caesar's proposed takeover price that suggests the market thinks a deal could be on the table. Given this some investors may consider locking in their gains.

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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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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.