888 Turns the Tables on William Hill, With Rank at its Side

888 Turns the Tables on William Hill, With Rank at its Side

My oh my how the tables have turned. It was back in February of last year that William Hill offered to buy 888 for £744M. Disagreements over value from one key stakeholder torpedoed the deal. In street terms, that key stakeholder wanted more money, and boy was he right. Now it’s 888, together with Rank Group that may be making a bid for William Hill, and judging by the numbers, patience and tenacity may have paid off for 888 here, assuming the deal goes through for which there is no assurance yet.

888 Turns the Tables on William Hill, With Rank at its Side888 being an Israeli company, the saying “Kol Mann D’Avid Rachmana LeTav Avid” is particularly relevant here for them. It means, “Everything that the Merciful One does is for the good.” The English equivalent would be “Everything is for the best.” It applies here in reference to 888’s failed bwin.party bid. The saying is based on a story of a Rabbi with a donkey, a rooster, and a candle looking for a place to sleep in one town while traveling. Nobody let him in so he slept in the woods, but a wind blew out his candle and wild animals ate his rooster and donkey. He responded by saying everything was for the best. He wakes up the next morning to find everyone in the town killed and their stuff stolen by robbers, and had they seen the candle or heard his animals they would have found him, too. It’s more of a way of looking at things rather than an ontological statement about reality, but in any case, better to buy William Hill than bwin.party. And back to numbers.

In February 2015 when William Hill made its offer, WMH shares were bordering on 400 pence. 888 was at 160. Since then, 888 has jumped by 36%, while William Hill has declined by 15%. 888 is now 13% higher than the total price offered by William Hill a year and a half ago. So not only is 888 more valuable now than what it was offered back then, but William Hill is cheaper now than what was worth back then, giving 888 and Rank a discount if the deal comes to fruition. As for Rank, it is up 27% since William Hill’s 2015 offer for 888, meaning it also has more financial power to buy them out.

There is another cool yet sneaky discount that 888 and Rank could get from this deal, and it’s due to the Brexit vote. While the vote will probably not change anything practically, it has certainly crashed the British pound sterling to 30 year lows. The GBP is 15% lower than it was when William Hill made its initial offer for 888. Yes, granted a lower GBP also hurts 888 and Rank who both earn money in that currency, but they also earn euros which are up against the pound. Their non-pound earnings plus the discount from the foreign exchange fall together give both another discount on net.

Looking at the shift from 2014 to 2015 as the point of consumption tax took effect, William Hill has been struggling. Revenue is down 1.1%, not so bad, but cost of revenue is up a crazy 28% despite slightly lower revenues, and total operating expenses are up 4.8%. Rank was a mirror image of that, and saw revenues grow 3.2%, cost of revenue fall 0.8% despite higher revenues, though total operating expenses did climb 1.8%, which is fine if revenues are growing faster, which they are. 888 certainly got bludgeoned by taxes just like the rest of the United Kingdom gaming sector, but revenues were still marginally up with cost of revenue marginally down, though total operating expenses did climb by 8.3%. The number show why it is 888 and Rank teaming up to buy William Hill and not the other way around this time.

It will be interesting to see how the business will be restructured. 888’s strongest segment is casino, with 52% of its revenue. Rank’s is physical casino, a good cross-marketing opportunity for the two and where much of the cost-savings comes from. William Hill excels in both sportsbook and casino for some nice complementarity. Who would run the back office, and would 888’s software take over the customer bases of the other two? Rank looks like it will stay more independent here since it’s not being bought itself, so how will the two work out whose software optimizes whose customers? From what I’ve seen of 888’s management, they are very proud of their back office and intended to ditch bwin.party’s entire operating platform and merge their customer base into their own framework. It’s not clear if they intend on doing that here or if Rank is even OK with that, but we’ll see when things get more concrete.Ed

There is a big danger though, muted for now but something to keep an eye on. The new Prime Minister in Britain, Theresa May, so far looks quite horrific. Brexit, if it actually happens, is only a good thing if the country then increases the level of liberty from what it was within the EU. Brexit gives the UK government more freedom to set its own policies, but that is not necessarily good. To take an extreme example just for conceptual purposes, (this is not realistic, just for illustration) if the EU has a law that governments in the EU cannot bomb their own cities for fun (which it probably does in some form) then that’s a very good law. If Britain leaves the EU and then proceeds to bomb its own cities for fun in an exercise of “national independence”, then that is not a good thing. Better to be part of the EU in that case.

In this case, slightly less bad than bombing cities for fun but quite destructive, May looks interested in bringing back the policy of “industrial strategy,” a classic central planning mess of entire industries in the UK by a bunch of power-crazed politicians and bureaucrats who would bankrupt any company if they were ever a CFO of anything on Earth. Bureaucratic technobabble aside, it’s when the government bails out losers with your money as a matter of policy, repeatedly, so you can finance companies that should not exist and failed executives can afford lavish dinners on your dime while you get poorer and poorer. It distorts the allocation of resources and makes economies miserable, and its only purpose is to allow politicians to play God with people’s livelihoods so they can go home at night to their loving families, none of whom actually work in any private industry, and pat themselves on the back for “doing something”.

Industrial strategy was killed by Margret Thatcher. If Thatcher is the Iron Lady, that makes May the Rubber Woman, or some other quip that isn’t too offensive but you get the point.  If industrial strategy is enacted by a May administration, then I may even consider selling 888 and Rank, depending on how far-reaching it becomes.