William Hill confirms merger talks with Canada's Amaya, reaction lukewarm

The FTSE 250-listed bookmaker, responding after rumours emerged at the weekend, said the potential all-share merger of equals would be classified as a reverse takeover and would see the new company incorporated and listed in the UK

"Over recent months, the board of William Hill has been evaluating options to accelerate William Hill's strategy of increasing diversification by growing its digital and international businesses," it said in a statement.

The confirmation that digital-only Amaya, whose PokerStars and FullTilt brands make it the biggest digital poker operation worldwide, has been reviewing its strategy since February 2016, hints that talks might have begun before London-listed Rank and 888 Holdings made their ultimately unsuccessful play for William Hill in August.

Interim chief executive Philip Bowcock was promoted from financial director in July, with some media reports suggesting he had held discussions soon after this.

"The potential merger would be consistent with the strategic objectives of both William Hill and Amaya and would create a clear international leader across online sports betting, poker and casino," the statement said.

Based on 2015 figures, the merger would create a £2.4bn sales and £700m EBITDA group, with a combined debt of £2.5bn.

Analysts noted that a merger would dilute William Hill’s current exposure to the risky UK retail business from the current 60% of revenues down to nearer 37%, but would increase exposure to unregulated markets from zero to circa 25%.

Credit Suisse said it felt there was a "good likelihood" of the deal progressing from the two companies' sides and that, with an increased digital mix supported by revenue synergies, around £100m of cost synergies plus long-term US optionality, a merger should be well received by investors, especially given Hill's 2017 forecast p/e ratio is just 11.6 times.

"Revenue synergies are likely to focus around cross selling WMH's sports and Vegas casino offering and vice-versa Amaya's poker. Compared to other industry mergers the cross-sell potential could be more meaningful."

Berenberg analysts said the positives for the deal were fulfilling the desire to increase digital exposure, geographical diversification and technological independence, there were concerns around that the value creation potential for William Hill’s shareholders, the increase in non-regulated exposure, "slim potential" for cross-selling from poker to other verticals, the high leverage and the "sheer complexity" of the deal.

"We need to assume a hefty synergy figure to generate value for William Hill’s shareholders," Berenberg warned. "Also, any potential accretion would need to be set against the potential negatives coming from the several million dollars of one-off costs reported by Amaya and from the risk of the ongoing Kentucky litigation related to PokerStars’ US activities between 2005 and 2011 (a potential $800m liability).

"As a reminder, we calculate that possible changes to the UK gaming machines regulation, much mulled over by the press, could, in a realistic scenario, shave circa 30% off William Hill’s standalone EPS."

There was a lukewarm reaction from investors too, with shares in William Hill rising only 2.4% to 301.7p just after midday, still well off the year's high of near 400p.