Playtech stance threatens Hills' Sportingbet acquisition and WHO stake
Solutions provider claims that acquisition of would impact on WHO valuation process - Sportingbet source explains decision to accept reduced offer for business.
Playtech has threatened to derail William Hill’s acquisition of Sportingbet’s Australian and Spanish assets after issuing a note suggesting the purchase should be counted within the valuation process for its joint online venture William Hill “ despite Hills’ CEO Ralph Topping saying otherwise.
In a statement issued almost immediately after Hills and joint bidder GVC Holdings had agreed final terms with Sportingbet, Playtech asserted that should the joint acquisition be completed, with a recommended offer of £454m having been accepted by Sportingbet’s board last night, Hills would be “obliged to offer to sell the remote gambling activities of Sportingbet acquired by it to William Hill Online (WHO) within six months of completion of their acquisition”.
It continued: “Playtech has the right, in its absolute discretion, to determine whether William Hill Online proceeds with the acquisition of the Sportingbet activities. Playtech believes that it is likely that the acquisition of the Sportingbet Activities would add considerable value to William Hill Online.”
Asked whether Hills’ stake in WHO should be valued based upon owning the Australian and Spanish businesses, Topping flatly denied that it would be an issue, before CFO Neal Cooper elaborated, saying: “WHO has a value that will be assessed through a valuation process. It would be perverse in the extreme to say ‘if it did this deal we think it might be worth X as opposed to not doing this deal’.”
In a note issued this morning analyst Ivor Jones of Numis Securities claimed Playtech’s stance indicated that it was trying to maximise the price William Hill pays for the stake in WHO.
This, Jones explains, can have two potential outcomes; one is that Hills does not acquire Playtech’s stake in WHO in the first half of 2013, or that it goes ahead and erodes the value created. The second scenario could see Hills pulling out of the Sportingbet acquisition, should the deal threaten to undermine the purchase of the WHO stake “ a situation he describes as “very confusing”. As a result he has downgraded his recommendation to ‘Reduce’, saying “in the light of these uncertainties, and the strong share price performance, we believe that William Hill shareholders should take profits”.
Analyst Nick Batram of Peel Hunt suggested the Sportingbet acquisition is already reflected in the current share price, adding that should the group agree a deal for Playtech’s minority stake in WHO, this is likely to be part-funded via equity. “Therefore, while we like the deal strategically and remain big fans of management, we consider that a Hold recommendation is about right.”
James Wheatcroft of Jeffries meanwhile adds that while Playtech’s announcement “adds uncertainty” to Hills’ share price, it means that the operator is “more likely” to buy the Playtech stake in WHO, and reiterated its “Buy” recommendation for Hills with a 370p target price.
Despite the continued success of the WHO joint venture, Hills and Playtech have endured a fraught relationship over the past two years.
In February 2011, the operator took out an injunction against its JV partner, described at the time as a defensive measure to block Playtech from amending the terms of the agreement in order to enter merger talks with Hills’ main rival Ladbrokes.
This was followed by a mass walkout of staff from William Hill’s Tel Aviv office in October of the same year, in protest over rumours that operations were to be moved to Gibraltar and the resignation of chief marketing officer Eyal Sanoff, who was said to be suing the company for “constructive dismissal.”
Unrest spread to the company’s Manila and Bulgarian offices, with over 500 staff thought to have taken action against the rumoured changes to the business, and the dispute was only resolved ten days after the strike began.
This was followed by speculation that Hills would trigger the “contractual valuation process” of Playtech’s 29% stake in the JV, estimated by analysts to be worth up to £493m. Topping confirmed that the process would begin in November this year, and gave the provider formal notice of the undertaking of the procedure at the end of the month.
Throughout the uncertainty the venture has continued to perform impressively, with Playtech revealing that the share of profit from the partnership rose a record 50% year-on-year (YoY), from 8.6m to 12.8m, in the third quarter of the year, with revenues rising 30% to 79.9m from 61.5m in 2011.
Source explains decision to accept reduced offer
A second note from Jones suggested that the agreed acquisition price of 56.1p per share was “unacceptable,” explaining:
“We do not understand how Sportingbet’s board could recommend that shareholders accept yesterday’s offer from William Hill/GVC. This is wrong time to sell the business and William Hill/GVC are the wrong buyers. We believe shareholders should vote against the scheme and encourage the board to conduct a proper auction at the proper time.”
Jones added that as Hills have no synergies in Australia, having pulled out of the market in June, the business would be of greater value to a bidder able to attract greater synergies.
However, a source close to the matter explained to eGaming Review that Jones’ valuation was based on a “perfect world scenario” in which another buyer existed, but without any other interested parties, this could not be taken into consideration.
eGR‘s source went on to explain why Sportingbet’s board had accepted the 56.1p offer, lower than the originally agreed 61.1p a share bid. The operator’s trading update for the three months ending 31 October, which saw a 35% year-on-year decline in European revenues, and Australian revenues down on margin, the source explained, was essentially a profits warning which reduced forecasts for Australian operations. With Hills having picked up on this, Topping is understood to have been “not keen to overpay”, and initiated crunch talks to drive down the price.
This, coupled with additional costs such as the two-year termination agreements with senior management, which would see CEO Andy McIver and CFO Jim Wilkinson owed two years’ worth of salary, bonuses, pension payments and other benefits “ netting McIver a total £2.4m payout “ forced the Sportingbet board to make concessions to complete the deal.