William Hill merger with 888 and Rank unlikely to happen, says Berenberg

William Hill’s shares fell on Thursday as Berenberg reiterated a ‘sell’ rating on the stock, saying a takeover by 888 Holdings and Rank Group for the company is unlikely to materialise.

The bookmaker on Monday rejected a revised takeover proposal worth more than £3bn from 888 and Rank. William Hill received a proposal from online gambling company 888 and casino operator Rank on 14 August after turning down an approach on 8 August.

“We believe the deal is extremely unlikely to materialise, which leaves the company short of potential suitors (on our numbers, it looks difficult to extract value from William HIll even assuming a very leveraged private equity acquisition),” said Berenberg.

The broker said reasons a merger probably won’t happen include a limited cash component, stretched financials, unclear synergies and a three-way deal burdened with execution risks.

Berenberg noted speculation of possible other bidders given William Hill’s “unique situation” with a temporary management team and the fixing of its digital division underway.

“We think these are far-fetched, as: 1) other industry players do not have the critical mass to acquire such a big target, and 2) a private equity fund would need to releverage William Hill very substantially (over 7x starting net debt/EBITDA) or offer a price below the current market price to generate a satisfactory IRR (10-15% in five years), according to our calculations.”

Berenberg raised its target price to 334p from 225p due to higher earnings estimates following the first half results. The broker increased its adjusted earnings per share forecast by around 2% for 2016-2018 to account for a lower tax rate guidance this year and a slightly more optimistic view of the digital re-launch.

Shares dipped 0.58% to 306p at 1038 BST.