William Hill investors should take Caesars’ money and run

Lombard nicknamed William Hill, the betting business, Zippy Chippy, a US racehorse famous for 100 starts and no wins after the group’s record of false starts, falls and refusals. The column may have to think of a better nickname after the bookie received a 272p bid from its US partner and casino operator Caesars. It focuses attention on online betting in the US as never before. Until recently, investors’ eyes tended to turn to the negative regulatory outlook for betting in William Hill’s UK heartland. In contrast, US state rulemakers have been freeing restraints on online gambling since 2018. 

That was the year William Hill signed a 25-year joint venture with the casino operator El Dorado, which became Caesars Entertainment, to gain access to the US group’s casinos and name. The UK group now claims a 29 per cent share of running sports books in Las Vegas and Nevada gambling halls and an 8 per cent share of online gaming across the US. Bulls reckon in time, as rules continue to ease and the market expands, William Hill’s market share could be nearer 15 per cent. 

In the next few months, about 40 per cent of the total US population will be in states where sports betting is legal, says one. If the spend per head in 50 US states is anywhere near where it is in the UK, the market could be raking in $20bn in revenues. And as it matures, margins will top 20 per cent. Some analysts reckon William Hill’s US operations might be earning £320m-plus before nasties and worth at least £3bn in time. That’s £1bn more than the value put on William Hill’s US operations by Caesars’ Monday offer. 

But its US operations won’t make a profit for at least three years. It will spend many millions on branding before it can hope to vie with Flutter’s FanDuel and recently floated DraftKings, which control about 40 per cent of the online sports betting market apiece. 

Tempting as it is to hope for a higher and alternative offer, the power is with the larger US group. Caesars has already made clear that it would terminate the JV if private equity house Apollo, which emerged as a potential bidder last week, were to buy William Hill. Caesars and Apollo do not have a happy history. 

William Hill’s newish top team is minded to accept 272p, which is about 40 times earnings forecast for 2021 and double the price of the equity issued in June. The board is also mindful of its predecessor’s form and that it is better to travel than to fall at the last fence. This columnist recalls an unloving equestrian who renamed his unpredictable steed Dogmeat.

Don’t over-Reach

Politicians and PRs know the key to outperformance is low expectations. Investors in publishing group Reach, which is intimately familiar with both politicians and public relations professionals through its Daily Mirror and Daily Express titles, have the resigned cynicism of hardened hacks. Shares priced at just two times forecast earnings indicate they barely expect anything of Reach at all. 

Management’s revelation on Monday that the business was performing materially ahead of market expectations was a pleasant surprise against an unpleasant industry backdrop. So too was the announcement of a bonus share issue, since the dividend is suspended. Shares jumped almost 20 per cent.

A short-term fillip shouldn’t trump longer-term reservations. Print journalism is still in decline, and the old-fashioned format still generated five times as much revenue for Reach as digital in the first half of the year. Digital advertising may be recovering, but even with a 13 per cent year-on-year increase in digital revenues in the third quarter, overall revenues fell by 15 per cent. 

As the great hope for future growth, digital advertising has yet to prove itself a money-spinner for most of the industry. Reach is relying on online registrations, which will allow it to track readers across multiple different sites and make its data more valuable to advertisers. It is doing far better than anticipated in signing up readers who have come to recognise the worth of local news suppliers. In February, boss Jim Mullen set a target of 7m registered readers in three years’ time. It already has 3.5m after the crisis sent readers online. But how much more valuable those readers are to advertisers — particularly if there is another advertising downturn on the horizon — still has to be proved. 

In the meantime its cost-cutting — which included sacking more than 500 staff — allowed Reach to maintain 19 per cent operating margins and generate £48m in cash from operations despite the downturn. Reach is an old hand at squeezing out savings through necessity. It has done so again. A review of print capacity announced on Monday could provide further fodder. 

Investors, even hardened ones, can hope for some more payouts. But they shouldn’t expect any great turnround in earnings. 

William Hill [email protected]

Reach: [email protected]

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