Determining the value of a gambling business in an uncertain world By Andrew Tottenham, Managing Director, Tottenham & Co September 29, 2020 at 12:07 pm UK betting operator William Hill was always a bridesmaid and never a bride — until last week. William Hill is finally in play, with offers from the gambling behemoth, Caesars Entertainment, and private equity firm, Apollo, although Caesars appears to be the frontrunner. The offers are around £2.9 billion (US$3.7 billion), 272p per share, about a 50% markup on the pre-COVID price per share, but lower than the market was expecting prior to the announcement, precipitating a fall in the price. Some people are never satisfied! Last week, I was listening to an online seminar on M&A in a COVID world. Part of the discussion concerned how difficult it was to value a gaming business at the moment, due to too many unknowns: the impact of the pandemic, the legalisation of online gambling in the U.S., the growing restrictions on gambling in Europe, etc. Considering the difficulty in valuing a business, the panel did not think there would be any major acquisitions happening any time soon. The very next day – boom! I always believed that William Hill would make an ideal acquisition for a gambling business in the U.S. and Caesars is a natural acquiror. Apollo can also see the value in the growth of online gambling in the U.S. However, if you look at William Hill’s business, the panel pundits are right. How can you put a value on the business when so much is uncertain? If we take a sum-of-the-parts approach, Caesars sees growth in the U.S. market and is taking a gamble on the long-term value of William Hill’s U.S. business. I don’t believe they are buying it for the European-facing part of the company. With Caesars’ presence in most major US markets and their lobbying power, doubtless they think they can turbocharge the U.S. business. William Hill, through its prior agreement with Eldorado Resorts, had exclusive rights to operate Eldorado’s sportsbooks. Since Eldorado acquired Caesars, there is some question whether that exclusive right applies to Caesars as well. William Hill already operates in 12 states and has access to a further 12. Quite how online gambling will roll out in the U.S. is anyone’s guess. Remember, gambling is regulated on a state level, so the U.S. is anything but one homogenous market. Indeed, it comprised 52 different markets, if you include Washington, D.C., and Puerto Rico. Which states will legalise what forms of online gambling and when is a favourite parlour game. The big question is, if WH is sold to Caesars (or Apollo), why would it want to keep its non-U.S. business, which includes more than 1,500 retail betting outlets? That really is not Caesars’ core business and management has already said it wants to focus on its home market. It is known that pre-pandemic Caesars U.S. were in talks to sell Caesars UK, but the pandemic put paid to that. They also had an agreement to sell the South African business, but that fell through as well. Assuming the acquiror wants to sell off the non-U.S. business, who would buy this business and for how much? In 2019, Hill’s U.S. business is only 8% of the company by revenue, hardly a large part. The UK represents 76% of its global business and their retail betting business is 45% of revenues. Clearly, Apollo and Caesars have priced in some risk to the UK-facing business and are more interested in what the U.S. means. The UK represents a large part of William Hill, but a part with an uncertain future. Still, they do need to know for how much they might be able to sell the non-U.S. business in order to set a price for the whole business. William Hill’s European business is facing a number of headwinds, not the least of which is the review of the UK’s 2005 Gambling Act. Despite the valiant efforts of the Betting and Gaming Council, further restrictions will undoubtedly be placed on Britain’s gambling industry. Likely outcomes of this review include a mandatory minimum speed of play for slot games. Earlier this week, the BGC got an announcement out making a commitment to a minimum game cycle of 2.5 seconds. They obviously learned the same lesson as I did from my school rugby coach, “Get your defence in early”! The BGC is hoping to avoid the FOBT debacle when the Government slashed the maximum stake from £100 to £2. I do believe it was a strategic mistake that early on in the campaign against FOBTs, the bookmakers did not commit to a voluntary reduction of a £30 maximum stake (the UK Gambling Commission recommended this figure). Had they done so, I think they would have that limit today. Another area that has reared its head is mandatory preselected loss limits. Players would set their maximum loss per session and would not be able to override their limit. Quite how that would work in a multi-operator environment is anyone’s guess. This could require major integration among all the licensed online gambling operators and given the poor performance of the industry’s self-exclusion scheme, I do not see that happening in this decade. Perhaps another approach would be to loop in the banks, in which players could set a limit with their bank on the amount they want to lose. Any request to load more than this amount would be denied. Possibly even cross-selling will come under the Government’s scrutiny. A recent report by the University of Strathclyde found that, at the early stages of the pandemic lockdown, customers who switched from betting to online casino games were more likely to report problems with gambling and this report is likely to the gain attention of a Government that wants to be seen as doing something about gambling. How you put a value on each part of the business, I do not know. You have two parts to the business: one very small with an unpredictable growth trajectory and the other much larger but facing the threat of significant restrictions on their ability to generate revenues. Caesars wants the small part and will sell the large part. A small change in the multiple they receive for the non-U.S. business will have a large impact on the price they ultimately pay for the U.S. business. In other words, it is extremely risky. The price of the bit they want to keep is highly sensitive to movements in the price they get for the bit they want to sell. Apparently, Caesars knows something I do not.