William Hill shares are in demand as investors bet that the bookmaker’s future is bright following the collapse of a joint approach from Rank and 888, whether on its own or as a continuing takeover target.
The Rank/888 consortium said on Thursday it would not make an offer following a rejection by William Hill’s board, prompting the bookmaker to announce after the market closed that it expected full year profits to be at the top end of expectations.
The news prompted postive comment from analysts, helping send William Hill shares 9.3p higher to 312.4p. Liberum said:
As we and the market expected, 888/Rank has failed in its proposal to create a three-way merger with William Hill. However, the gaming industry is demonstrating through a whole series of M&A transactions that smashing these businesses together can create major synergy benefits and generate value for shareholders.
In light of this, the status quo at Hills is certainly under threat and in the short term, there could be a value opportunity given the depressed share price.
Meanwhile we edge up our target price to 323p (was 319p) as William Hill guides towards the top end of the range for 2016 EBIT.
In a buy note Deutsche Bank said:
We had argued that either a bid would transpire or that William Hill was undervalued. Either way we saw attractive upside potential to William Hill shares: please see our note: William Hill: Betting in play. We now focus on the stand-alone William Hill. We see several areas of downside protection but attractive upside potential.
Includes: 1) The pre-approach share price was around 315p, or around 265p prior to the departure of the former chief executive; 2) William Hill has strong valuation support with around 4% dividend yield and around 8% free cash flow yield; 3) the company has now re- confirmed that trading for the full year is expected to be at the top end of guidance £260-280m; 4) numbers should be further underpinned by newly identified cost synergies (not quantified); 5) the online gaming markets are consolidating so any missteps could revive M&A discussion/action, in our view.
To have rejected an offer around 40% higher than the current share price, we argue that William Hill must be comfortable with the underlying progress of the company. As we anticipated, William Hill has re-comforted the market on numbers, and online progress. The suspended share buyback programme (£60m so far out of £200m target) may provide further support. We await news on a chief executive, with a suitable candidate possibly adding a further catalyst.
At Stifel, analyst Jeffrey Harwood stuck with his hold recommendation:
The decision by 888 and Rank not to proceed with a complex and unusual offer is not a surprise to us. Our view was a three-way transaction would be difficult to consummate for obvious reasons, particularly given the nature of the proposal and the lack of enthusiasm shown by William Hill for the transaction.
Following its rejection of the approach from 888 and Rank and its underperformance in the last year, we look to William Hill to execute the turnaround at William Hill Online and to recruit a new chief executive. We believe the shares have recovery potential if the turnaround can be successfully executed. Our preference is for more focus on improving the existing operations as opposed to international expansion through acquisition. History shows that it is difficult for UK gaming companies to expand internationally and Hills’ experience in Australia demonstrates this.
