Shares in 888 Holdings (LSE: 888) shot higher last week on news that William Hill (LSE: WMH) had launched a 203p per share bid for the firm.
Today, 888 shares opened down by nearly 15% after the firm admitted that the deal was off, as one of 888’s major shareholders — thought to be one of the firm’s founders — had refused to accept William Hill’s offer.
The bid was seen by most analysts as pretty generous, valuing 888 on around 14 times earnings before interest, tax, depreciation and amortisation. Indeed, even after today’s sharp fall, 888 shares are still trading on 17 times 2015 forecast earnings.
That looks enough, to me, as while 888’s Casino offering — which accounts for around half of revenues — is performing well, the firm’s other two largest divisions, poker and bingo, were described by the firm as “low growth” and “mature” respectively in last year’s interim results.
888’s fourth and final division, sports betting, is growing fast but is very small — in my view, this is an area where William Hill should surely be able to hold its own.
Is William Hill a better buy?
William Hill would probably have struggled to afford to pay more than its initial offer for 888, but I think the firm’s management should be praised for resisting the temptation to overpay.
William Hill is responding to rising tax and regulatory headwinds in the UK with strong overseas expansion, and is in the process of transferring recent acquisitions such as Sportingbet to the William Hill brand.
The firm’s strong historic presence in the UK’s sports betting market should position it well to maintain long-term market share.
Although William Hill is reliant on fellow FTSE 250 member Playtech for its online technology, I don’t believe this is a major weakness, given the proven quality and popularity of Playtech’s product.
Should you raise your stake today?
William Hill isn’t exactly cheap, but shareholders may yet be grateful that the firm avoided the injection of debt or equity dilution that would have been required to fund the purchase of 888.
Trading on a 2014 forecast P/E of 13.0 and a prospective yield of 3.2%, William Hill’s valuation is more appealing than the FTSE 250 average of 19.4 and 2.5%, in my view — and I believe the bookmaker’s shares represent a decent medium-term bet.