Why Rank is in pole position in three-way M & A saga

The

Ranklogo
situation that William Hill, Rank Group and 888 Holdings have left themselves in is similar to that of the last three contestants on the game show Golden Balls.

To those unfamiliar with the show, players would be dealt balls either with values of money or the word “Killer” displayed inside, with the aim of the game to vote off players possessing killer balls or trying to convince other players that you possess the highest amounts if you find yourself in a weak position.

When three players were remaining, the general rule of thumb would be that one player would have the casting vote and have to decide which of the other two players they would like to take through with them to the final round, facing a dilemma as to who was bluffing and who would genuinely contribute towards future success. This is arguably where Rank finds itself now.

A messy deal

That assertion is not necessarily based on statistics, but it is based on the fact that Rank has managed to get through the process of attempting to buy William Hill alongside 888 without bitching in front of the public and is more likely to be willing to do business with one party or the other in the future.

888 and Rank confirmed last week they were pulling out of the current process, after making two proposals for William Hill, valuing the operator at approximately £3.6bn and 394p per share based on the closing price of 888 shares on 5 August.

Gareth Davis, William Hill Chairman, called both proposals “highly opportunistic” and William Hill felt “substantially undervalued,” while 888 owner Eyal Shaked called the rejection of the bid “pure ego” on Twitter, one of a number of critical tweets.

This gives further proof to the notion that William Hill and 888 are as likely to do a business deal as the Montagues and the Capulets, after a key 888 stakeholder was reportedly the stumbling block when William Hill tried to buy 888 for £700m last year. Regardless of the sizes of each company, Rank has been left as decision maker if a regular two-way deal will surface.

There is little history of three-way mergers in the gaming industry and it would always be probable that the three would struggle to all get the deal they would have wanted. The integration of two businesses is difficult enough, so the integration of three businesses would pose a challenge for even the most experienced business analysts to comprehend.

Here is how the three companies find themselves, in terms of market cap, at the time of writing, according to Yahoo Finance:

William Hill - £2.78bn

Rank - £877.1m

888 - £773.5m

A potential reason for the three parties being the right fit for each other, aside from the fact that all three have missed out on the M & A craze sweeping the industry, was the prospect of synergies in online growth. Here are the online revenue figures for the last full-year figures available.

William Hill (net revenue) – £550.7m - +4% and 35% of group net revenue

888 (an online-only operator) - £462.1m - +2%

Rank - £87.5m (12 months ended 30 June 2015) - +21% and 12% of group revenue

William Hill vs 888

From these numbers, there is a clear pro to Rank potentially doing a deal with William Hill, as its sheer size can boost Rank’s online division. There is also the link between Rank CEO Henry Birch and William Hill, as Birch is a former CEO of William Hill Online, which would be comparable to Paddy Power’s merger with Betfair in February, with Betfair CEO Breon Corcoran’s ties at Paddy Power from his time as COO there coming in handy. It is worth noting though that William Hill’s online gross profit dropped 11% for 2015 to £424.6m and online net revenue fell 11% year-on-year for the 17 weeks ended 26 April.

The fact that William Hill is currently without a permanent CEO following James Henderson’s stepping down does make things more difficult, as the questions that came to mind when observing the arguments were: Who is making the decisions at William Hill? Were they planning to appoint a new CEO and then strike a deal? Can they do a deal without a CEO and just give the job to Birch/Itai Frieberger? It all seems confusing and clouds a chance of any big-name operator doing a deal with William Hill for the time being.

For 888, much can be read into the fact that Rank has in a sense already agreed to go ahead with a merger between the two companies. Had William Hill been impressed by either proposal, it would have been acquired by BidCo, the merged entity of 888 and Rank, with 888 acting as the acquiring entity. Both were keen to get a deal done, both seemed to be on the same page and neither has the uncertainty that William Hill has over the CEO situation.

Presuming that Rank has not been scarred by being on the end of the wrath of William Hill, it is now left with a testing choice as to who it will be taking through to the next round of activity.

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