Is William Hill out in the cold?

‘Always a bridesmaid, never the bride’. It’s a phrase that can now only be used to describe a select few tier-one online gambling operators, many of which have walked down the M&A aisle a few times but never actually consummated the marriage. William Hill is one such company to have missed out – either intentionally or unintentionally – on the ongoing consolidation in this industry and in doing so has lost what was once a top-three market position online.

The UK-focused bookmaker has, of course, come close to tying the knot many times. In the last few years it has been in advanced negotiations with the likes of Rank Group, 888 and Amaya (now The Stars Group), the latter of which has in the space of just a few weeks snapped up CrownBet (including William Hill Australia) and Hills’ UK online rival Sky Betting & Gaming (SBG). Meanwhile, GVC’s aggressive acquisition strategy has shown no sign of abating either.

For a company which was once one of the world’s leading online gambling operators, William Hill has witnessed rivals such as Paddy Power Betfair, The Stars Group and GVC build scale which is now on another level to its own. And while many of Hills’ rivals have overtaken it online, the bookmaker must now contend with the fact it faces a massive hit to its retail business after the UK government recently confirmed it had opted to slash maximum stakes on FOBTs to £2 for both roulette and slots alike. According to Canaccord Genuity, this could knock c.£95m off group EBITDA when fully mitigated through shop closures.

As a result, chatter is now once again growing of there being increasing pressure on William Hill to complete a major transaction to help it catch up with its online rivals and offset a weakening retail business. Indeed, Hills’ new chairman, Roger Devlin, himself recently warned Prime Minister Theresa May that such a crackdown on gambling machines could lead to not only job losses and reduced taxe revenue for the treasury, but it could also force the company to sell up to a non-UK entity.

“Consolidation within our sector continues and I would also not want to see the impact of a disproportionate… outcome being a factor in the name of William Hill being added to the list of companies now in foreign ownership,” he said.

One exec speaking off the record said Devlin’s letter was simply a way of “telling the world to come and get us”. However, the company is in a far better position than just a couple of years ago. And while a deal could well still be the answer to its prayers, its renewed fortunes online may well negate the need for Hills to join the M&A club anytime soon and persuade the board to go it alone.

Building momentum

The operator’s most recent trading update revealed an online business that appears to be in good health in the lead up to this year’s World Cup. Digital net revenue during the three months to 31 March 2018 increased 12% year-on-year, driven by strong 17% growth in sports betting (with GW margin +1.3ppts to 8.8%) and an 8% rise from its gaming business after improved cross-sell. Like many of its counterparts, William Hill benefited from extremely favourable sporting results during Q1 2018, but it also outperformed rival Paddy Power Betfair which reported a 1% and 4% fall in sports betting and gaming respectively.

More importantly, the solid trading statement followed what was a critical year overall for William Hill Online. After a 3% fall in digital net revenue in 2016, revenues last year climbed 13% year-on-year to £617m with sportsbook and gaming both rising by double digits. Many in the City also believe Hills got a decent price for its Australian business at £176m. And even if the firm needs to take some major corrective action in its UK retail estate, it will still have a relatively strong balance sheet and good cash flow – at the end of 2017 net debt to EBITDA ratio reduced to 1.4x and cash generation was £290m.

According to Simon French, an analyst at Cenkos Securities, the turnaround to its online business and broadly positive group finances means the need for Hills to enter the M&A fray has drastically reduced compared to a year or two ago. “I don’t think it [William Hill] does have to do a deal. It could have done plenty of deals in the past but for whatever reasons that hasn’t happened,” he says.

“It has streamlined the business by disposing of Australia, which I think was the right thing to do, refocused its UK online business and got it back into decent growth, and it seems a bit more amenable to operating in unregulated markets which will keep the top line growing a little bit ahead of the UK growth rate. The online part of the business is in relatively good shape now and fair play to the team for getting it there as it seemed at one point to be on a proper downward spiral.”

The strong Q1 online figures, which also included a 10% increase in actives, helped offset what was a weak performance from its retail arm after reporting a 4% year-on-year decline in net revenue. And it’s in this sphere that French believes Hills will need to take drastic action, particularly now the triennial review is finally out of the way and nearly 40% of its licensed betting offices become loss-making. However, this may come in the form of a CVA rather than M&A.

Go your own way

Of course, if William Hill was to do a deal, the question of who it would most likely partner up with comes in to play. 888 would appear to be the most obvious candidate, with the two companies having tried twice previously to get a deal over the line, while fellow UK multi-channel operator Rank Group may also be top of the list. The odds on the latter may also have shortened slightly since former William Hill non-exec John O’Reilly took over as CEO of Rank in May.

What Hills won’t want to do is be panicked into a deal for the sake of doing a deal. As the industry has seen many times in the past, there can be huge benefits to consolidation but there can also be massive downsides too when trying to smash massive businesses together. And if it was true that scale was always a winner then there would never be challengers coming in and disrupting the status quo.

“Nobody ever has to do a deal,” Dan Waugh, partner at Regulus Partners, says. “Bankers tend to be good at suggesting companies have to because deals make bankers rich. We create these narratives where we say that the cost of doing business is going up, therefore to be efficient we have to consolidate, but I don’t think that is always true. In my career I’ve seen that bankers are very keen to put stuff together, wait a period and then tell everyone they need to take things apart again.”

Arguably one of the most compelling reasons as to why Hills is unlikely to strike a major deal anytime soon is its enviable US position. Since 2012, the operator has steadily built a formidable business across the pond under the leadership of CEO Joe Asher, and today owns more than 100 sportsbooks in Nevada. This equates to a market share of 29% by revenue and 57% by number of locations. This positive momentum has continued into 2018 with William Hill US recently reporting a 45% (62% in local currency) rise in net revenue during Q1, with amounts wagered on mobile up 39%.

And with regulated sports betting expected to explode across the US following the repeal of PASPA, it would seem Hills is in by far the strongest position than most of its UK competitors. And if the firm can capitalise on this opportunity and maintain the momentum created in its online business, then the likelihood that Hills will continue to go it alone seems increasingly more likely.

“They’ve got the right people, a good track record and own the majority of the tech stack in their US operations,” French concludes. “The partnerships they’ve created with casino owners in Nevada and other places means they are very well placed to off their proposition and product. It’s the one bit of the business that has truly differentiated from the others and this seems to be their time.”