William Hill’s suspended fate

Moving from underdog to favourite, William Hill spent the last month catching up with peers, helped by the restart of the sector consolidation following GVC’s bid on Ladbrokes  and by the surprisingly-soft position expressed by the UK Gambling Commission regarding stake limits on gaming machines.

However, the best odds are on the waiting game as any regulatory clampdown on these machines could wash away a quarter of William Hill’s business.

Catching up with peers

Regulatory blur about to clear

The high uncertainty surrounding gaming machines in the UK added a layer of volatility on top of a business already relying on unpredictable sports results.

The Triennial review is set to draw the fate of the UK Retail activities as it will set the new stake limit on Fixed-Odds Betting Terminals (FOBTs), currently making up one third of William Hill’s top line.

Optimism recently came back when the UK Gambling Commission handed over its final report to the government, advising to cut the roulette maximum stakes to ‘at or below £30’, contrasting with the January news reports rumouring that the government was about to cut stakes to just £2.

Betting on the £30 scenario seems, however, risky as we don’t know what importance Ms May will attach to this report.

M&A to the rescue

Another driver behind the recent price surge is the amplified M&A speculation following the exit of William Hill’s main shareholder, Parvus AM, from 14% to below notifiable level.

In 2016, the London-based hedge fund came out against William Hill’s proposed merger with PokerStars’ owner Amaya. Now that the activist fund is out, all bets are on and a second merger attempt is plausible.

William Hill also announced last month the sale of its Australian business to Crownbet for an enterprise value of about £169m, or 6.1x 2017 EBITDA.

The deal was welcome by the market as the bulk of local earnings would have likely been smoked once the new point of consumption federal tax regime enters into effect, while the credit-betting ban applied from February has already started to weigh on the local wagering as the group prepared for its implementation (local stakes were down 15% in H2).

The sale of the Australian unit will free up some cash and beef up the group’s firepower, which could later be used to finance growth projects in the US where sports betting is likely to get legalised soon and where William Hill already has a strong presence, owning 108 sports books in Nevada.

Decent fundamentals…

Fundamentals are relatively unsurprising, fitting well with current market trends, which in itself isn’t that bad for a company whose online business underperformed the market for several years.

The Retail side of the business is rather flattish as stakes struggle to grow in such a mature and ageing market while the revamped digital offering is creating the bulk of the traction, with double-digit growth in both sports wagers and gaming last year.

The group also secured £25m savings in 2017 and expects to save an annualised £40m, to be later reinvested into product development and marketing.

…yet odds look uncertain

The consensus find no upside on todays’ price, which seems fair given the total lack of visibility we have on the future cash flows.

If passed by the government, the £30-stakes scenario would unlock a significant amount of fresh upside as William Hill’s stars would start to align (good fundamentals, regulatory blur cleared, M&A speculation, World Football Cup in June).

However, going long on William Hill before the triennial verdict is a roulette play we would not try. Instead, investors might want to go long on GVC, which offers far better odds while bearing little to no exposure to the triennial outcomes.