Shares in online gambling firm 888 (888) dropped 1.8% to 408.6p on Tuesday after third quarter growth stalled in the face of tough 2020 comparatives.

In the consumer facing divisions (87% of total revenues) sales for the quarter through September grew 7% year-on-year to $220.3, led by a strong performance in gaming up 11% to $193.5 million offset by a decline in betting revenues which declined 15% to $26.8 million.

In the same period last year, the company benefited from a condensed sporting calendar after events earlier in the year were disrupted by Covid-19 lockdowns. Compared with 2019, betting revenues were 21% higher.

The company said key regulated markets in particular Romania and Italy delivered strong performance.

Full-year guidance was reiterated despite the company highlighting a roughly $10 million potential profit impact from the closure of Dutch operations from 1 October following regulatory changes to that market.

GAME CHANGING AQUISITION

As well as launching SI Sportsbook in Colorado which utilised the company’s inhouse sports betting platform for the first time in the US, the company also launched in Germany.

However, the biggest milestone was the proposed £2.2 billion acquisition of William Hill’s international business (9 September) which is expected to close in the first half of 2022.

As well as providing scale the acquisition improves the sales mix by doubling sports betting to 28% of the overall business while potentially increasing earnings per share by more than 50% according to Numis’ leisure analyst Richard Stuber.

£100 MILLION COST SAVINGS

The transaction is expected to deliver around $100 million of synergies, triple the firms’ revenues and increase operating margins from 18%-to-22%.

The one potential drawback is that the acquisition increases net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) to four times, although strong cash generation is expected to reduce the ratio below three times by the end of 2022.

The company has indicated that the dividend policy of paying out half of adjusted net profit will be unaffected by the proposed acquisition.

Richard Stuber reckons the company’s £500 million proposed equity raise could be increased to provide more wiggle room, especially given the government’s current review of the Gambling Act which could have a further negative impact on earnings.

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Issue Date: 19 Oct 2021