FOBTs Review May Rekindle William Hill/The Stars Group Merger Courtship

A recent article by the Financial Times suggested that a flurry of mergers and acquisitions could be expected within the global gambling space and that major British bookmakers will play a central role in the consolidation deal-making. The reasons are more than clear – regulatory hurdles and growing competition within the gambling industry.

The timing should also not come as a big surprise. The UK government is set to release its triennial review of the state of the nation’s gambling industry in late October. The review will be to a great extent focused on the highly demonized fixed-odds betting terminals and growing concerns about their proliferation and the risks this poses to vulnerable customers of UK’s betting shops.

The UK online gambling space is also becoming more and more tightly regulated and the £7.8-million fine iGaming operator 888 Holdings was imposed by the UK Gambling Commission back in August came as one of the brightest recent manifestations of the regulatory body’s determination to curb irregularities.

The article produced by the Financial Times pointed to several likely merger/acquisition deals, and a possible tie-up between British bookmaker William Hill and Canadian gambling giant The Stars Group (recently rebranded from Amaya Inc.) was among those listed by the financial news outlet.

Reportedly, both companies are interested in a merger and it is believed that talks on the terms of a deal will commence as soon as the government’s review is released. This will not be the first time when consolidation discussions will be taking place between the two gambling operators. A £5-billion deal was under consideration this time last year but discussions fell apart due to pressure from William Hill’s leading investor Parvus Asset Management.

Why Did Parvus Object to the Deal?

In a letter to William Hill’s board, Parvus founders Mads Gensmann and Edoardo Mercadante said last year during the ongoing Amaya reversed takeover talks that the hedge fund would not back a deal that was based on “risk, debt, and hope”. Parvus held a 14% stake in the British bookmaker at the time.

The hedge fund’s founders argued that an Amaya tie-up would burden William Hill with a large debt (approximately $3.5 billion) and that was the last thing the company needed at a time it was struggling to improve its profitability and its overall financial state.

Last spring, William Hill issued a profit warning, reducing its full-year profit forecast by £30 million. The operator delivered profits at the bottom end of its revised profit expectations in the end of 2016.

Another thing that concerned Parvus was the fact that online poker was Amaya’s main business and the company was thus operating in the least attractive online gambling sector. The investor agreed that William Hill needed a strong iGaming partner, but did not see Amaya and its main brand PokerStars as such partner.

Lacking support from its main investor William Hill walked out of consolidation talks shortly after the Parvus founders’ letter emerged. However, with the looming changes in the UK gambling landscape, a wave of merger and acquisition discussions will probably be unleashed and will likely culminate in the creation of new industry players. And as mentioned above, there have been signs that William Hill and The Stars Group may be courting each other and may rekindle consolidation talks to help one another endure the tough times ahead.

What Has Changed since Last Year?

William Hill’s revenue improved in the first half of the year in comparison to last year’s result. The company posted a 1% decrease in its operating profit. Yet, given the fact that the reviewed six months did not feature a major sports event unlike the 2016 corresponding period, during which the UEFA Euro 2016 took place, the slight drop was not that concerning. In general, it could be said that William Hill seems to be in a better financial state than last year.

However, this may change significantly following the publication of the government’s probe into the gambling industry. Currently, William Hill is the operator of UK’s second largest chain of betting shops and therefore the second largest operator of fixed-odds betting terminals. There have been massive campaigns against the controversial gambling machines and it is believed that campaigners’ calls for a reduction of the maximum stake FOBTs accept will be finally heard and such a reduction will be introduced.

Although it is still unknown how much exactly the stake will be reduced, it is more than clear that the move will have a significant impact on operators with strong UK retail presence, with William Hill being one such operator.

The company has long been determined to improve its online business and establish itself as a leader in the field. A profitable online business will certainly offset at least partially the losses William Hill will suffer from a reduction of the maximum FOBTs wager. And to improve its online business, finding a partner with experience in the field and presence in multiple jurisdictions will be of great help to the operator.

This was one of the main reasons why consolidation talks between Amaya and William Hill were initiated last year and that same reason may resurrect discussions this year. Here it is important to note that online poker may still be The Stars Group’s most profitable business, but the gambling giant has said that it would also invest funds and efforts into growing its online casino and sports betting businesses, as well. And it will, too, need an experienced sports betting operator in order to be able to expand and establish itself into that field.

Last but not least, it is also important to note that according to The Star Group’s latest financial report, the company’s debt has been reduced to $2.55 billion, which means that it is now going along with significantly lighter burden, a fact that could eventually help Parvus rethink its stance on a future combination.

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