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As Playtech is gobbled up, is this FTSE 250 stock next?

Close up of multi-ethnic people gambling
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Yesterday’s news that gaming software supplier Playtech (LSE: PTEC) will likely be snapped up by Australia-based Aristocrat Leisure for £2.7bn shows that the takeover frenzy of UK-listed companies shows no sign of abating just yet. Is fellow FTSE 250 firm 888 Holdings (LSE:888) another potential candidate? Today’s trading update from the online betting and gaming firm certainly makes the company an attractive target.

Game on

Total revenue rose 7% to just under $230m in the three months to the end of September. As usual, the vast majority of this ($220.3m) came from the company’s business-to-consumer (B2C) division. Here, an 11% rise in gaming revenue was logged. This is impressive when it’s considered just how good the previous year was for the company, thanks to people being forced to stay at home (and surf online).

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On the downside, a 15% fall in betting revenue was also reported from this part of the company, due to the “condensed calendar of sporting events” happening in Q3 last year. Even so, B2C betting was still 21% higher compared to Q3 two years ago. For me, this is a far better way of gauging just how quickly the company’s growing. 

All of the above brings 888’s revenue for the year-to-date to $758.3m. That’s a rise of 28% compared to January-September 2020.

But can this last?

The fact that 888 continues to rake in cash following the lifting of restrictions bodes well. For its part, management believes that trading over the remainder of 2021 will be in line with expectations. 

Then again, nothing’s guaranteed. Aside from the (admittedly small) possibility that we’ll want to spend less time at our screens, one issue with any gambling-related stock is the potential for increased regulation. 888’s no stranger to this after the Dutch government’s recent decision to launch a licencing system for online betting in the country.

As a result, 888 removed itself from this market at the beginning of October. It now intends to apply for a licence “in the coming months” and be up and running by H2 next year. Even so, the company’s expecting a $10m hit to earnings. This may help explain why the share price is down today.

Will 888 be snapped up?

In a move that could turbocharge profits in the year ahead, 888 snapped up William Hill International in Q3. It also launched SI Sportsbook in Colorado and 888sport in Germany. Having been the hunter for a while, however, I think it’s quite possible that 888 could become prey. 

At yesterday’s close, shares were trading at 20 times forecast 2021 earnings. That looks very reasonable for a company that boasts a strong brand, is growing well, has net cash and consistently posts excellent returns on the capital it invests. Even if a suitor doesn’t come knocking immediately (and I’m against buying solely on this possibility), I wouldn’t rule out further consolidation in the industry in time.

The one that got away

888 is one of those stocks I highlighted as being a potential bargain in the early days of the coronavirus crisis. Unfortunately, it’s not a stock that I went on to buy myself. Had I done so, I’d be sitting on a gain of around 260% by now. Still, one can’t be invested in everything.

Offering a tempting combination of growth and income, I’d be comfortable buying this stock today — takeover candidate or otherwise. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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