September 28, 2020 - 4:47pm EST by
2020 2021
Price: 274.20 EPS 0 0
Shares Out. (in M): 1,045K P/E 0 0
Market Cap (in $M): 2,850 P/FCF 0 0
Net Debt (in $M): 330 EBIT 0 0
TEV (in $M): 3,180 TEV/EBIT 0 0

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This is a merger arb idea. William Hill Plc (WMH in London) is a quintessential 'heads I win, tails I don't lose' trade that seems highly attractive. The stock is priced at 274 and change, and the company has announced a 'Possible Offer' from CZR at 272p. As we shall discuss, in most all states of the world your downside case is losing <1% of your money and tying up a bunch of capital for a while. On the other hand, due to the peculiarities of the UK Takeover Code, as well as the specifics of this situation, I think an overbid is quite likely, and there is deep upside available if activists get involved in what is an incredibly open register. 

Given the time sensitivity of this idea, it will be necessarily short. Am happy to answer any questions in the comments. Note that there have been two prior writeups of WMH, the most recent one (end of 2019) gives a lot of great fundamental background that is required reading to get up to speed to where we stand today (indeed in the interests of time i defer most of the fundamental discussion to that writeup).

You can read CZR's deal prospectus here: https://www.sec.gov/Archives/edgar/data/1590895/000119312520255119/0001193125-20-255119-index.htm

You can read WMH's press release discussing the offer here: https://www.williamhillplc.com/media/13543/24-statement-regarding-a-possible-offer.pdf


There are four main points to my thesis:

1. CZR is getting an incredible deal

2. Despite appearances to the contrary, WMH has reasonable negotiating leverage

3. Shareholder base + UK takeover mechanics favor WMH

4. Scenario analysis


1. CZR is getting an incredible deal

At 272p, the implied takeout EV for WMH is 3.18bn GBP. This is about 11.5x 21E EV/EBITDA and 22x EV/EBIT, so at first glance this doesn't look cheap at all. However, since the US operation is barely profitable now, most all the earnings come from UK Retail and Online, which CZR has suggested will be divested entirely (ie they are just keeping the US). If we put reasonable comp multiples on the UK Retail segment (6x 21E EBIT of 55mm) and Online segment (12x 21E EBIT of 125mm), and if we capitalize half the corporate costs at 6x (since there will be some corp synergies and most of the corporate goes with the retail biz), the implied price paid for 80% of the US business is 1.5bn GBP. This implies, in turn, a valuation of 1.9bn GBP (so call it $2.5bn) for the entire William Hill US business (since WMH owns 80%, CZR owns 20%). 

How should we think about this valuation? Jefferies thinks WMH US does 200mm GBP in revenues next year at 10% EBIT margins - so theoretically this is 10x revenues, clearly not cheap. But this also represents close enough to 30% market share in the nascent US sports betting market - a market narrative so beloved that DKNG (with 10% market share and losing boatloads of money) has a $20bn market cap today. PENN has zero revenues today, but analysts are already giving it credit for a 10% market share out a few years, and the sports betting story is solely responsible for adding $7-8bn+ to its market cap in the last few months. I am not one of those 'relative value' bros, but a child could work out that William Hill US listed on the Nasdaq, with 30% market share, an exclusive marketing partnership with ESPN, and prime position throughout all the ERI/CZR land-based casinos would be worth considerably more than $2.5bn in the market's eyes, given where competing assets trade. CZR themselves realize this, since they already sold stock in the US to finance this transaction (a move the sellside, Roth Capital, is already ballparking could create $10bn in value accretion for CZR).


2. Despite appearances to the contrary, WMH has reasonable negotiating leverage

The market is looking at this deal as if CZR is the only possible acquirer of WMH, because of the rights CZR has to revoke operating access if someone they don't like (ie, anyone but them) acquires the business. But that is missing the point - WMH can simply threaten the status quo as the alternative (ie not another acquisition by a third party), and instead pursue a relisting of the US business independently of CZR. The reason time is on WMH's side is two-fold: 1) they own 80% of the business, and actually conduct all the operation of the sports books and do all the heavy lifting today (it is essentially WMH's global technology platform and experience as a sportsbook operator that is the backbone of the service and the reason the JV was constructed as it was); CZR/ERI simply brings the real estate and loyalty program. If you even do a cursory listen to recent CZR/ERI calls, all the questions/concerns are about the online sports betting growth in the US and what CZR/ERI is going to do about. That's the point - CZR HAS to do something, the status quo is not good enough for them (they only own 20% of the JV that has the dominant share in the market). Meanwhile WMH, despite the terrible equity sale recently at highly dilutive levels, is now basically delevered and has other cash cow businesses to support the US development, without giving up ownership to CZR. 2) CZR has already done the equity offering and thus shot their bolt! That was a profoundly silly move, and now necessitates them following through and closing the deal (in my view). Meanwhile, WMH has the wherewithal (both financially and operationally) to play the long(er) game. They could easily pursue an alternative whereby they list say, 10% or 20% of WMH US in the US; get a market valuation; and thus force CZR to pay through the nose for ultimate control. I don't think this ultimately happens, but it is what every engaged/activist/sensible shareholder will be saying to WMH management/CZR when they call in the coming weeks...


3. Shareholder base + UK takeover mechanics favor WMH

The UK is an interesting jurisdiction for takeovers. The mechanics are quite tight and especially the timeline - to the acquiree's advantage. Thus, since a 'Possible Offer' has been announced, CZR now has 28 days (measured from Sept 25) I believe to proceed to a formal offer or back away (the 'put up or shut up' provision). If they don't proceed to a formal offer, they have to back off for a year. A lot can change in a year and I believe CZR shareholder angst would become unbearable - especially in the context of the grand strategic plans Reeg has for the combined business. In other words the structure of the UK Takeover Code means the situation is highly reflexive: if enough noise is made by unhappy WMH shareholders over the next few weeks - and/or if a true activist like Elliott gets involved - CZR is (I believe) basically forced to improve their offer or face walking away for up to a year. A year is a very long time in the US sports betting industry.

Moreover the regulatory process is likely to be long and tortuous (given gambling, etc). CZR/WMH are already suggesting a 2H 2021 close - ie almost a year from now. That is more than enough time to relist in the US - ie the alternate course is, truly, a viable alternative.

Shareholder structure helps here too. The register is basically open; there is no anchor shareholder to win over. CZR owns 1% of the shares now, that's it. The legacy Done family owns 6%, then the largest is HG Vora, at 5%. HG Vora bought their stake VERY recently - they will NOT be satisfied with 272p, I believe they wanted the DKNG-like valuaiton from a US relist and long-term exposure to US sports betting on the cheap. There are a number of other smaller shareholders who share similar views to me (ie that this is a blatant robbery). That alone is probably enough to get to a 10% position (blocking minority squeezeout at 90%). Note that most UK takeovers set 90% acceptances as a minimum condition, and thus, without a major shareholder locked up, I'm not sure CZR is really in a position of strength here.

4. Scenario analysis: heads I win (big?), tails I don't lose

There are three scenarios I see as I sit here today:

1. CZR deal goes through at terms: I lose <1% and opportunity cost on my tied up capital. Oh well, tis but a scratch.

2. CZR doesn't like the pushback they hear from shareholders in the next month of sounding and decide to walk away: what happens then? Considering the stock was breaking 225p based just on the US sports betting theme alone, and that shows no signs of slowing down, I doubt the stock actually falls all that much. Especially since the alternative to the CZR deal is well known by all major holders at this point (ie, relist the US biz in the US) and is far more value accretive. Sure, the stock is prob down on the day it 'breaks' but I doubt it closes below 220p. In any case - this scenario is HIGHLY UNLIKELY to happen, for all the strategic/financials/operational reasons ennumerated earlier.

3. CZR pays up: this is more likely to happen with a public activist (hence my posting this on VIC, as the situation is highly reflexive). In this scenario I believe some price that accords more appropriate relative value to the US entity; or pays WMH shareholders pro-rata with shares in the US entity to be listed later, or something, could add a lot to the purchase price. Given Jefferies/Roth suggest somewhere between $5-10bn of value accretion to CZR at comp multiples, the % upside on the current takeover market cap - $3.6bn - could be truly significant even if only a small portion of this latent upside makes its way back to WMH shareholders. I am thinking something in the 350p range, but this is really a matter for the Elliotts of the world to decide.

Still - its a heady cocktail of good things that can happen, all with extremely minimal capital risk in the base case.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Deal renegotiation

Activist involvement

Alternate plan to relist US biz in the US

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