What is the next step for William Hill?

William Hill has leapt to centre stage in recent weeks, forcing everyone to take another look at what had become the poor relation of the UK online gambling sector. And although Caesars, and any other bidder, was primarily concerned with the US side of the business, the deal has oddly got everyone reconsidering the value of William Hill’s European business too. The implication the acquirers were keen to offload the non-US bits of Hills certainly got a lot of folk to snap to attention. There is some absurdity in paying nearly $4bn for a business where you’re not interested in…the business. And what we have left is a lot to get your teeth into. There are the UK shops, and an online business that is a combination of William Hill UK, William Hill International (Spain and Italy and some grey markets) and Mr Green. And these are all sizeable businesses in their own right. William Hill UK was £480m in CY 2019 and will be around there in CY 2020. It’s pretty much 50/50 sports and casino and runs on a bunch of third-party and in-house tech with in-house trading. Mr Green and the rest of William Hill International is on course for around £300m in CY 2020 and is far more gaming-focused with again a mix of in-house and third-party technology, and a large team based in Malta. Beyond that, you have the shops that in a normal year will be generating more than the UK online business and look to have survived the UK FOBT stake reduction OK so far. Growth has been pretty low across the business in the last few years, but there should still be a long list of suitors.

Picking apart the business

This is a business that is probably more attractive as its parts than as the sum of them. Nobody really wanted William Hill, but there will likely be a lot of firms interested in bits of William Hill should that be the route the acquirers go down. The UK online business in particular is a very attractive asset. Organic growth in the UK is incredibly hard and that’s a sizeable database of players and ongoing revenue, and you can hardly say it’s a business that is incapable of improvement. The confusing factor is they did recently roll this up with UK retail, but surely nobody actually wants a bunch of shops in this economic environment? Well perhaps Fred Done and Betfred might. It’s not impossible, although he has said it won’t happen, that they bid for the whole thing. But that’s not even the end of it, as you also have WH International and Mr Green. Most acquirers of WH UK Online would probably be interested in these businesses also and, again, Kindred would welcome the addition of Nordic, Italian, Spanish and perhaps an entry into a certain hot non-western market. Could you split off international from UK? Yes, quite feasibly. Different platforms, different brands and mostly different teams. You could certainly see more value as separate deals. So where does this all leave William Hill’s European business in the longer term? Well, if it’s able to separate retail from online, then it presents a very attractive option to a number of potential acquirers. The UK feels like such a closed shop in 2020, not least in sports betting, that the ability to buy a high single-digit market share of online really shouldn’t be dismissed.

Adding value to online

There will be several firms that feel there is the ability to add value to an underperforming business here. There should, at least in theory, be a long list of potential suitors for William Hill Online. From the industry you would expect Kindred, 888 and maybe even Rank to be among the front runners, but the likes of Betsson shouldn’t be ruled out. Fred Done may have ruled himself out in public, but the idea of Betfred acquiring the entire retail and online operations makes compelling strategic sense as it does for Tipico if they wanted to move to another level in their growth ambitions. A management buy-out has also been mooted and there would likely be no major issues in raising capital from private equity for the business from management or other sources. This could even open the door to some private operators who you might automatically rule out. But that would likely rest on the retail side of the business being disposed of and some form of deal to retain the brand being in operation, so not quite as straightforward as it seems. The international side of the business is more interesting, comprising William Hill’s Italian, Spanish and RoW business, and the Nordic, German and wider European business of Mr Green. These are still two fairly disparate businesses on differing platforms with very differing approaches to brand and product, and it may make more sense to treat them as separate entities in any disposal. It’s possible even that Caesars wants to retain Mr Green as its in-house online casino business and there would be a viable case for this. But European online casino feels like a business reborn and one that suddenly has the most growth potential in it. The Covid-19 lockdown accelerated existing trends in terms of the shift from offline to online gaming, although it should be noted that shift was still relatively small in terms of the percentage of revenue and players who migrated when faced with a total shutdown of land-based. That can be viewed as both a negative and a positive and there seems to be some momentum carried through into Q3 to give weight to the optimistic outlook.

The value of Europe itself

What is perhaps less clear is what value a ‘European’ casino operator represents in the next decade, with Europe representing a patchwork of local regulated markets. As regulators become more sophisticated, and more heavy handed in their approach, the intricacies of product, staking and bonusing limitations will make having a homogenous brand and offering a tricky thing to pull off and certainly acquisition and retention marketing strategies will need to be retooled for each market to a degree not really seen before. Even under these criteria the Mr Green business, with potential upside in new regulated markets such as Germany and the Netherlands as well as a strong base in the Nordics and potential growth in Italy, looks fairly well positioned. But would you be better starting from scratch in some of these, or acquiring local market specialists and building your own network of operators and brands? When you add in the additional overhead of a legacy technology platform and an operational base that is from another era of online gambling and a brand that was built in it, then you begin to have questions to ask over what is truly an attractive asset in 2020. It’s interesting to note serial entrepreneurs Joe Saumarez Smith and Michael Brady targeting Germany with a new start-up working closely with the massive Gauselmann Group that bought out Saumarez Smith’s last venture Bede Gaming earlier this year. The German gaming market is so dramatically different in regulatory terms from the current dotcom model that it almost makes more sense to rip things up and start again than to try and restructure an existing business to compete. The same could be true in the Dutch market when it launches, and even in the Nordics where restrictions on marketing and bonusing, and latterly deposits, have caused significant upheaval.

Looking beyond the UK

If there were to be big regulatory-led changes to the product offering in the future, then it’s hard to make too strong a case for the value of established businesses over new ones, and certainly harder to make the viable case for a business successful in another territory being able to port its strategy over. Much as we’ve seen in the US, if your business isn’t specifically designed for the market you plan to operate in, then you have a serious uphill battle to fight. So, what is the likely end result of all this? Probably the death of mid-market firms and the creation of an even bigger gap between the top tier of firms and the remainder. There will also be local giants who dominate their own markets but have very little meaningful chance of breaking out elsewhere due to the strategic differences required. Opportunities will absolutely exist for start-ups and smaller nimble locally focused firms who are then likely to get picked off by the increasingly large egaming giants that stand over them and dominate in certain local markets such as the UK. Capturing growth from channel shifts and from various distinct European markets is too big a task for a £1bn-a-year revenue operator you suspect. The big question is just how many of the giants we will end up with and how much longer the likes of Kindred, 888, William Hill, Betsson and even Gamesys and LeoVegas can resist the merger merry-go-round.