Online gaming group 888 has jumped 19% as investors had their first chance to react to the weekend's news of a bid approach from Ladbrokes, its second attempt to buy the company in four years.
Ladbrokes yesterday confirmed it was in early stage talks about a possible offer, following reports of a possible 70p a share bid valuing 888 at around £240m. This morning 888 agreed it was in talks but said there was no certainty of a formal offer. That has not stopped shares in 888 - tipped as a takeover target for some while - from climbing 9.25p to 58.25p. Ladbrokes is down 0.5p at 127p. Analysts at Collins Stewart said there could be rival bid interest - US casino group Harrah's for one - but also warned that regulatory risk could yet scupper any deal. Analyst Simon Davies said:
There is history here – Ladbrokes approached 888 in November 2006, with a bid approach of double the purported 70p, but withdrew on US regulatory concerns. Ladbrokes would be attracted by a stronger online platform, given that it has been somewhat left behind by William Hill Online. And with a relatively new chief executive on board, the deal would have clear strategic appeal. However, it also carries significant regulatory risk, given that 888 has not procured a non-prosecution agreement with the US Department of Justice, which represents a potential poison pill.
The other obvious interested party in 888 would be Harrah's, the US casino operator, which has a partnership deal with 888's B2B arm Dragonfish. However, the B2B deal is still awaiting "suitability approval" from the Nevada
Gaming board, after eight months of discussions – and with the US remaining some way from a Federal agreement to reverse UIGEA, it would appear too early for US operators to buy into online.
888 ... lacks critical mass in a number of markets and has struggled to adjust its cost base to reflect reduced revenues. We believe that a 70p offer should be a slam dunk for investors, but see significant regulatory risk to a successful transaction. We will therefore stick at hold, but adjust our target price from 40p to 55p to reflect the potential bid premium.
