The 888 Holdings (LSE:888) share price jumped by 28% in early trading on Thursday. The stock has fallen considerably over the past year as the brand failed to maintain its stellar growth rate from 2020. The FTSE 250 firm had traded at a premium as multiple Covid-19 lockdowns saw a spike in online gaming.
What’s behind today’s rise?
The shares rose as 888 Holdings announced a new financing structure for its now cheaper acquisition of betting competitor William Hill.
In September, the FTSE 250 firm agreed to buy the non-US business of William Hill from American casino operator Caesars Entertainment for £2.2bn. 888 anticipated that it would need to raise around £500m to cover the cost of the deal.
On Thursday, 888 Holdings announced that it had now agreed a new deal to purchase William Hill’s non-US assets. The new figure is between £1.95bn and £2.05bn.
The renegotiated price reflects a “change in the macroeconomic and regulatory environment,” noting a review of William Hill currently being undertaken by the UK Gambling Commission, 888 said.
The new financing plan is considerably scaled back from its previous bid to raise £500m in equity to pay for the deal. It is understood that shareholders will vote for the William Hill deal in May. The purchase would therefore be closed in June.
888’s shares are still considerably lower than when the company announced the deal in September. This is partially due to the fallout of Russia’s invasion of Ukraine as well as the general pullback from gambling stocks post-pandemic.
Last year, analysts suggested the takeover would quadruple 888’s size.
888’s performance
Investing in gambling stocks isn’t for everyone, but the industry can be very profitable. At yesterday’s closing price, the price-to-earnings ratio was around 13.5. This doesn’t mark it out as being particularly cheap. However, other indicators suggest the firm is well run.
Over the past six years, return on capital employed — an important metric for measuring profitability — has averaged 30%. The figure suggests that it is one of the most profitable on its index.
In March, the firm said profit before tax surged 205% to $81.3m in the year ended December 31.
The company’s long-term strategy makes sense too. It recently announced the sale of its Bingo business to a unit of UK-based Broadway Gaming Group. Instead, the group intends to focus on its core offerings in the US.
888 anticipates further growth in 2022, albeit not at the rates seen in 2020. Profits are likely to be several times higher than they were just half a decade ago.
I’m not buying just yet but this FTSE 250 stock certainly could be an interesting proposition for my portfolio. It also offers an attractive 4.2% dividend yield if I were to buy in at the current price. That’s better than the index average but still less than recent inflation figures.