WOULD 'WILL POWER' FLY?

8 February 2008

Will Hill "mismanagement" of online operations criticised


Evolution Securities opened the "fantasy merger" season with a speculative look at combining major UK online and offline gambling groups William Hill and Paddy Poker this week, The Guardian blog reports.

Branding their study "Will Power," Evolution suggested that Paddy's marketing and "product development" expertise would benefit William Hill's abortive online sportsbook efforts.

"We have today issued a report proposing a nil premium merger between William Hill and Paddy Power," the Evolution study informs. "We believe Paddy Power's skills in marketing, risk management and product development would complement William Hill's scale and reach. Our analysis indicates that after extracting synergies the combined entity could pay a 76p per share special dividend and, if valued only on the same 9.3x forward [earnings] multiple as William Hill is currently, would have a share price of 505p, 19 percent above the current level.

"The online business of William Hill has tarnished the group's reputation for management excellence by mismanaging the online sportsbook technology project. With GBP 26 million already wasted in write-offs and charges, the company is now embarking on implementing a third-party solution. Wouldn't it be better to merge with Paddy Power and let a team that knows what it's doing to fix the problems?

"Each board offers complementary skills, so both could stay and therefore buy into the deal. Post-deal earnings would be 64 percent UK retail, 23 percent online - more oriented to online than William Hill and yielding more growth opportunities than Paddy Power. Our estimated GBP 43 million of synergies should be enough for shareholders to accept the deal. Would they rather wait and see if the share prices recover, or accept a value-creating deal now that releases surplus capital? We would take the deal. "

And the share price reaction? William Hill has fallen 7.75p to 411.5p while Paddy Power is 3.5 percent lower at Euro 20.07.

"Still, no harm in making the suggestion," The Guardian observes.

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