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.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.