The US Beckons For William Hill

Published in Company Comment on 4 May 2011

The betting firm has made three Stateside acquisitions.

Bookmaker William Hill (LSE: WMH) has made its third acquisition in the US in a month, in a campaign to establish a sound footprint in the US market.

The company is buying Brandywine Bookmaking, a land-based sports betting operator in Nevada and Delaware. Last month it bought two other similar businesses in Nevada, listed American Wagering and the sports book division of Club Cal.

It has spent $55m acquiring the three companies, which is subject to receiving a Nevada gaming licence. It looks a subtle but significant change of emphasis in the company's international development.


The betting and gaming industry has been frustrated with regulatory developments in Europe. Though the EU is promoting the establishment of regulated markets, which would favour the legitimate operators, implementation at the national level has failed to deliver a level playing field.

Last year William Hill pulled out of France. And after being forced to open the state betting monopoly to private companies by an ECJ judgement, Germany has proposed regulations which cut completely across the concept of an open market. Online betting operators will only be allowed to take bets from German punters if they also own a bricks and mortar casino in Germany.

The US

By contrast, developments have been more encouraging in the US. 

Cliff D'Arcy described how last month the FBI took action against online poker sites which continued to offer real money games to US players in defiance of federal legislation. The all-above-board European operators hope that their compliance will put them in a good position if and when the US introduces regulated gaming.

Both internet and land based gambling is highly restricted. Land-based sports betting -- the core of William Hill's business -- is permitted in only four states, Nevada, Delaware, Montana and Oregon. Nevada is the largest with an estimated turnover of $2.7bn, and William Hill's acquisitions will give it a 25% market share.

Before transaction costs, the acquisitions are expected to be modestly earnings enhancing after the first full year, which will be 2013, with some synergy upside from combining the three purchases.

But William Hill is clear this is only a start of its investment in the US. These acquisitions give it an experienced local management team, access to a Nevada gaming licence, and established regulatory and industry relationships.

And Brandywine is the exclusive odds maker for the Delaware State Sports Lottery. William Hill hopes this will give it a head start if other states set up lotteries when they look at regulating sports betting.

Current trading

Apart from its US coup, William Hill has been doing pretty well. Since I wrote about it last July the shares, which have just gone ex-div, are up about 23% at 214p.

Results for 2010 came in at the top end of analysts' expectations, with revenues and operating profit up 7%. Within that, retail revenues grew a modest 3%, but William Hill Online, in which Playtech (LSE: PTEC) has a 29% share, saw 22% operating profit growth on revenues up 24%. The online segment produced a third of William Hill's pre-tax profit.

With strong cash flow, the company was able to reduce net gearing from 74% to 52% and increase its dividend by 11%.

The momentum has continued in the first quarter of 2011, with revenues up 11% year-on-year and operating profit up 21%. Again, modest retail growth (+8%) was trumped by online growth (+26%).

The fly in the ointment

All is not well in the online joint venture, though. William Hill's arch rival Ladbrokes (LSE: LAD) is rumoured to have sounded out Playtech with a merger proposal. 

Certainly Playtech approached William Hill to renegotiate its joint venture agreement. And William Hill promptly took out an injunction preventing Playtech from selling its stake in the venture. A full court hearing is due this month.

Though not in the same league as the dispute between BP (LSE: BP) and the Russian oligarchs, injunctions between JV partners is not good news.

The JV accelerated William Hill's online offering but there was always a tension between its objectives and those of Playtech, which provides back-end services to the whole industry. An ongoing dispute would stymie the business, but if the end result is that William Hill takes over the whole operation then it may have proved a valuable way of establishing its online activities, whatever the price.

I am happy to keep my William Hill shares, which are trading on a prospective PE of 9.2 and yield of 4.1% (covered twice). But I have hedged my bets by buying some Playtech shares. If William Hill suffers any adverse fallout, then Playtech is a likely winner from it.

More company analysis:

> Tony has shares in William Hill and Playtech.

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theRealGrinch 04 May 2011 , 3:12pm

I cannot see any reason to buy either William Hill or Ladbrokes based on fundies. Both of them have balance sheets I would not touch. Better opportunties with Sportingbet and 888.

SevenPillars 05 May 2011 , 2:13pm

theRealGrinch - Perhaps you should expand on what it is you don't like about the balance sheet of both William Hill and Ladbrokes? Both of these missed much of the market bounce after 2008 and both have been putting their house in order since then. They look like decent recovery plays and other than issues like Playtech, the main concern may be more to do with the domestic economy and leisure spending going forward, but so far they have weathered austerity pretty well.

TRhere 06 May 2011 , 9:45am

WMH net gearing is 52% (down from 285% two years ago) with interest covered over 3 times. It has a new 5 year revolving term bank facility. Cash flow from ops is 115% of PBT. Dividend is covered 2.6 times. Admittedly the balance sheet is mostly intangibles, but the fundamentals look ok to me.

Tony Reading

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