It's been a while since we've had any fantasy merger plans from brokers, but Evolution Securities has come up trumps today. The broker is proposing a merger between bookmakers William Hill and Paddy Power, and has labelled the combination "Will Power". (Feel free to groan).
Over to Evo:
"We have today issued a report proposing a nil premium merger between William Hill and Paddy Power. We believe Paddy Power's skills in marketing, risk management and product development would complement William Hill's scale and reach. Our analysis indicates that after extracting synergies the combined entity could pay a 76p per share special dividend and, if valued only on the same 9.3x forward [earnings] multiple as William Hill is currently, would have a share price of 505p, 19% above the current level."
More on the rationale:
"The online business of William Hill has tarnished the group's reputation for management excellence by mismanaging the online sportsbook technology project. With £26 million already wasted in write-offs and charges, the company is now embarking on implementing a third-party solution. Wouldn't it be better to merge with Paddy Power and let a team that knows what it's doing to fix the problems?"
Moving to the key question, is it likely to happen:
"Each board offers complementary skills, so both could stay and therefore buy into the deal. Post-deal earnings would be 64% UK retail, 23% online - more oriented to online than William Hill and yielding more growth opportunities than Paddy Power. Our estimated £43 million of synergies should be enough for shareholders to accept the deal. Would they rather wait and see if the share prices recover, or accept a value-creating deal now that releases surplus capital? We would take the deal. "
And the share price reaction? William Hill has fallen 7.75p to 411.5p while Paddy Power is 3.5% lower at €20.07. Still, no harm in making the suggestion.
Elsewhere shares have drifted lower after a slightly stronger than expected UK services sector report. This will be one of the last pieces of economic news before the Bank of England's interest rate decision this Thursday.
Richard McGuire, a strategist at RBC Capital Markets, said: "[The survey was] firmer than anticipated and pointed to a surprising degree of resilience on the part of ervice providers while also presenting some troubling signs of rising pricing power. It is very unlikely to stay the Bank's hand at this week's meeting but, if this sector remains similarly unbowed in the coming months it raises the risk of the Bank opting to take somewhat of a longer break between rate cuts than we currently anticipate."
At the moment the FTSE 100 is 17.5 points lower at 6008.7. BP is leading the way, up 3% after its results, but among the mid-caps, chipmaker Arm slumped 14% as its full year figures missed analysts' targets and it was cautious about 2008.
