Rising Stars and Hill slides – divergent tracks after merger talks

The degree to which the fortunes of the Stars Group and William Hill have diverged since their failed merger talks 18 months ago provides an interesting counterpoint to the current obsession with sector M&A.

A recent note on Stars published by the Canadian analyst team at Canaccord Genuity noted that the company’s share price rose 54 percent in 2017, placing it at the top end of online gambling sector performers.

The analysts said it was a year of “operational delivery” with the management team strengthened by a number of new appointments, the latest of which has seen ex-William Hill online chief Andy Lee announced as the new head of the BetStars sportsbook operation.

The group’s financial metrics are certainly on the up. Free cash flow is expected to double year-on-year to C$449m with the net debt to EBITDA ratio falling back to 3.2 times from 4.3 times. This was after a $198m earnout payment to the previous owner of the company was met during the year. Full-year EBITDA guidance for 2017 has risen to between C$590m and C$610m compared to consensus of less than $540m at the start of the year.

Stars chief executive Rafi Ashkenazi has said recently he is interested in potential M&A, with the acquisition of unidentified sportsbooks apparently at the top of his agenda. The merger chatter about William Hill might even be revived.

Renewed speculation likely accounts for another 11 percent surge in the Stars Group share price since the start of the year. But the trajectory of William Hill since the near miss of October 2016 should give him and his shareholders pause, perhaps.

The merger attempt failed due to concerns on the part of a key William Hill shareholders that the UK company would be shackling itself to a failing giant. In light of subsequent events, it might be that the shoe is on the other foot.

The William Hill share price has been largely static over the course of the last year and recent newspaper stories suggesting the government was leaning towards a £2 maximum stake for the bookies’ gaming machines caused a 10 percent fall just the other week.

It won’t have gone unnoticed that the combined movements mean that the Stars Group is just edging it as the larger company with a market cap of circa £2.7bn compared to William Hill’s £2.6bn valuation.

The revival in Stars’ fortunes raises inevitable speculation about would have happened if the two had merged.

Where Stars has been helped in recent years is in its ability to make its own luck. Ashkenazi has used the period of independence to manage the regulatory-driven headwinds (it has pulled out of Australia, the Czech Republic and Poland) and maintain growth in the core poker product without allowing the casino operations to wholly cannibalise revenues.

In the meantime, William Hill has been through a relatively torrid time. The online operation has been in turnaround for a number of years and the soon-to-fall sword of Damocles that is the triennial review could yet decimate the company’s retail operations.

The performance of the operation in Australia, meanwhile, provides illustration of the difficulties that can be encountered post-M&A. Recent statements from the management would suggest the attempt to buy its way into Australia via acquisition is at the point of failure.

It demonstrates the adage that execution really is the be-all-and-end-all of M&A. For all the speculation, it is the work done post-deal that will determine a deal’s ultimate worth, not the valuation achieved when it is signed.

The recent merger chatter involving both William Hill and Ladbrokes Coral has concentrated on what the triennial review means for the UK high street businesses, and with good reason.

But necessary as the various valuation attempts are, they aren’t hugely enlightening about what the future holds should the big succeed. Certainly, the advent of the GVC bid has somewhat masked the evident struggle Ladbrokes Coral is having with the Ladbrokes brand itself. Execution there would certainly seem to be awry.

GVC has a decent record of improving the prospects of its buyout targets. But it will have its hands full taking over the underperforming Ladbrokes and the more middling Coral.

A combined Stars/William Hill entity would be well-placed if the US sports betting landscape were to open up and Ashkenazi would surely stay with the business post-deal to drive further online progress.

But if the newspaper rumours are true about a £2 stake limit on gaming machines then whatever rump shop estate is left following the inevitable closures would act more as a drag than a driver.

It wouldn’t be the sole cultural issue either. Excitable analyst chatter almost inevitably focuses on what are almost euphemistically called cost synergies – job losses in other words – and managing that process has proven to be a trial elsewhere in the sector.

None of this will halt a deal – the momentum of M&A discussions is focused on getting it over the line. But spare a thought for those who pick up the operational baton once the bankers have collected their fees.

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