Rank and 888 Offer For William Hill Has Lots of Ifs and Buts

(Bloomberg) -- The idea of a mega-merger between three big U.K. publicly traded gaming groups looked a stretch when plans leaked in July. Confirmation of the details on Tuesday has underscored what a leap of faith it is.

Rank and 888 are behind the plan. They want to merge and then immediately take over vastly bigger rival William Hill. Their bid proposal is worth 364 pence a share, or 3.2 billion pounds ($4.2 billion), to William Hill -- or so they say. William Hill has rejected this, rightly.

The first problem is the price is too low. William Hill's share price was 313.5 pence on July 22, valuing it at 2.7 billion pounds on the last date trading was undisturbed by takeover speculation. The proposal is a 16 percent premium to that. This is an insufficient uplift for giving up the standalone option.

The second problem is that it's not certain what Rank and 888's offer is really worth. It comprises 1.7 billion pounds in cash plus 45 percent of the newly created company. The value of that stake is open to interpretation.

The three companies were worth a combined total of about 4.5 billion just before talk of a possible deal surfaced. Deduct the cash that would be paid out to William Hill investors in the deal, and the combined equity would be around 2.7 billion pounds.

That would put the value of William Hill's stake at 1.2 billion pounds. So on that analysis, William Hill shareholders get 2.9 billion pounds of value from this complex transaction -- just 200 million pounds more than they started with. 

How to get to the 3.2 billion-pound deal value touted by the bidders? Hopefully, deal efficiencies would do the job.

Analysts estimate these could be 75 million pounds after tax annually. Valued at 10 times, an appropriate multiple for cost savings, they're worth 750 million pounds up front. William Hill shareholders' 45 percent share would be worth 340 million pounds. This lifts the value of their stake in the new company to 1.54 billion pounds. Add the cash part of the offer and bingo, you're there. 

What's more, if stock investors give the new company a lift, that's another bonus.  

Who knows? For starters, the cost savings might be hard to realize. Moreover, it's possible that equity investors mark down the stock as the new would-be company would likely have net debt of more than 4 times Ebitda for 2016, excluding deal benefits. That's high. Indeed, 888 shares, which would be the acquisition currency, have dipped in recent days, indicating potential concern on the transaction.

William Hill's rejection is carefully worded. It doesn't say the strategic logic of the combination is inherently bad, just no better than its standalone future. That leaves open the possibility of accepting a higher bid. Rank and 888 have a challenge on their hands. First they need to show that the deal value they're touting is credible. Once they do this, they'll still have to give William Hill shareholders a much bigger stake in the newly created company. 

A raised offer might do the trick. But the odds on that are long.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.