Rank and 888 turn tables in joint approach for William Hill

Rank Group and 888 Holdings have begun talks about a £3bn joint takeover approach for struggling high street bookmaker William Hill.

No formal approach has yet been made for William Hill, which last week axed chief executive James Henderson, but over the weekend the company said it received "a highly preliminary approach" that did not include proposals on price, timing, terms, form of consideration or transaction structure.

The rumoured bid price of £3bn would correspond to a share price of roughly 360p, which would be a 15% upside on Friday’s closing price and roughly 20% above the average price over the past three months.

The move represents a humiliating turnaround for William Hill as it failed in a £700m bid for 888 last year due to an inability to agree on a price, which suggests negotiations could again be difficult.

Furthermore, on Monday the FTSE 250 group, while it said it would listen to any proposal, rather superciliously dismissed the rationale for the deal, saying "it is not clear that a combination of William Hill with 888 and Rank will enhance William Hill's strategic positioning or deliver superior value to William Hill's strategy".

London-based Rank and Israeli counterpart 888 argued that they see "significant industrial logic" in a merger, chiefly as it would produce "substantial" revenue and cost benefits from the economies of scale, with analysts eyeing £100m of synergies from a combined group that would have an enterprise value close to £5bn.

Being in an 'offer period' means William Hill must suspend share buybacks.

The trio have until 1700 BST on Friday 21 August to thrash out a deal under the London Stock Market's takeover code, though this can be extended.

Broker Liberum said William Hill was in turmoil but a deal was far from certain: "Hills is vulnerable at the moment given not only the CEO's departure but also following significant turnover in senior operational management and after the profit warning in March," analyst Jason Holden wrote. "The latter was based on customer behaviour in terms of self-exclusions/time-outs plus lower win margins, neither of which seemed to be impacting competitors to the same degree."

Greg Johnson at Shore Capital saw "significant rationale of combining the groups both from a scale perspective and the potential for significant cross-selling from the enlarged retail customer base", with the three groups generating a combined EBITDA of some £570m with some £1bn of online net gaming revenues that would put it second only to Bet365 online.

He calculated total synergies of potentially £100m could be achievable, on top of potential for cross-selling, but conceded that such a complicated deal looks "difficult to pull off".

Berenberg said its preliminary calculation was that synergies could equal circa £65m, or 10% of the cost base excluding taxes of the three companies’ digital divisions.

Berenberg mooted several uncertainties that could scupper the deal mainly: "The deal is quite complicated as it entails the merger of three relatively large operators; 2) the structure of the deal is critical - we think William Hill’s shareholders would prefer a cash offer rather than a mix of cash and shares; and 3) in the event of a (partial) cash offer, the deal would increase exposure of William Hill’s shareholders to unregulated markets via 888 and to retail activities via Rank, neither of which are attractive."

Shares in William Hill opened 9% higher at 343p after 15 minutes of trading on Monday, while Rank and 888 were both up 3% at 243.5p and 228.36p respectively.