Gambling company William Hill (WMH) is to buy European peer Mr Green (also known as MRG) for £242m, helping to expand its geographic reach.
Investors welcomed the news, sending its shares up 4.8% to 218.1p, although the stock still remains near five-year lows.
MRG has operations and holds remote gambling licences in Denmark, Italy, Latvia, Malta, the UK and Ireland.
Most gambling firms have focused on the US for expansion since the sports betting market opened up earlier this year, so some investors may be surprised at William Hill looking elsewhere for acquisitions.
The US market could be worth up to $9bn in gross gaming revenues according to gaming consultant Global Market Advisors.
William Hill already has access to 13 states - via a partnership with casino group Eldorado - where sports betting is either legal or hopefully soon to be legal.
TAPPING INTO ONLINE GROWTH
William Hill believes the takeover of MRG will offer an expanded pan-European footprint in the faster growing online betting and gaming markets and focus less on the struggling UK market.
Thanks to MRG’s online-only business, William Hill expects its group online sales to rise from 42% to 47% and international revenues to expand from 14% to 21%.
A potential risk is from MRG’s ‘grey market’ exposure which related to unregulated markets, representing 23% of its interests. Most of this relates to Sweden where MRG is hopeful of getting a license by the end of 2018.
Unregulated markets are problematic for gambling companies as earnings can take a huge hit if the respective government decides to crack down and impose strict rules and punitive taxes.
Consultancy Regulus Partners is sceptical of William Hill’s decision to buy MRG due to the aforementioned exposure to unregulated markets at a time when the acquirer is struggling with operational pressures.
IS THE DEAL GOOD VALUE?
William Hill has offered a 48.5% premium for MRG based on the closing share price on Nasdaq Stockholm on Tuesday.
‘Mr Green’s shares have been drifting this year, creating an opportunity for William Hill to swoop on a business with decent brands and attractive earnings growth,’ comments AJ Bell investment director Russ Mould.
On certain metrics the deal looks cheap such as the fact it is paying 7.9 times EBITDA (earnings before interest, tax, depreciation and amortisation).
Yet on a free cash flow multiple of 14-times, the deal looks more expensive, especially when the headwind of Swedish taxes and synergies are taken into account, argues Regulus.
