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Auctions can bestow a winner’s curse. Victors may ultimately regret their bid when prices have been bid up in what can feel like a test of strength. When Comcast bested 21st Century Fox for Sky in 2018, it paid a whopping 125 per cent premium over the undisturbed price.
Is online gambling group 888 paying an inflated price for William Hill’s international business? It has seen off rival bids from private equity to strike a deal with Caesars Entertainment for an enterprise value of £2.2bn.
At first sight, the price looks steep. It amounts to a premium of almost 50 per cent, if judged by valuations put on William Hill when it was quoted. Numis’s last published sum-of-the-parts valuation put a price tag of £1.2bn — equivalent to 7 times ebitda — on the online business — and a further £300m — four times ebitda — on the retail business.
If analysts reran their numbers, they would probably put a higher multiple on William Hill’s online assets. Improvements to the sports betting app have been a hit, pushing up the market share of the UK online business by just over half to 14 per cent during the pandemic.
As a trade buyer, 888 should have a deeper understanding of the business than financial bidders. The group can also extract cost savings they cannot. If these amounted to £100m a year, they would cover the premium once taxed and capitalised.
Short term, the deal is a negative for 888’s share price. But that partly reflects the loss of its status as a potential takeover target and plans to raise about £500m of new equity. That, together with strong cash flow, should reduce net debt to ebitda to below 3 times within two years.
The deal should in time close the discount between 888’s shares and those of larger rivals such as Entain. It will make the combined group the fourth-largest online operator by revenue. As the regulatory thicket becomes denser, scale is a growing advantage.
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