Share Watch: William Hill's US expansion is a pricey gamble but could pay big
The riveting battle for the English Premier League title between Liverpool and Manchester City has me looking at television stations I wouldn't normally go to, but it has been particularly instructive about the current state of play in the international gaming sector.
Every time there is a break in the football coverage, the screens have been filled with a series of inventive adverts for the gambling business. It underscored, for me, just how big betting has become. Regulatory changes, along with added taxes in the UK and Australia, but especially a clampdown on fixed odds betting terminals (that's slot machines to you and me) have added to its woes.
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UK bookies are looking to duck domestic headwinds by building up their international business, particularly in the US following recent changes to the gambling landscape there.
Last year the US Supreme Court overturned a 25-year federal law banning sports betting. Bookies on this side of the pond think it is a new gold rush. However, the ruling allows the gaming business in the US to vary in each state with its own betting laws. This has not deterred UK bookies hoping for another bonanza. GVS, owner of Ladbrokes, has agreed a joint venture with MGM casinos. Paddy Power, soon to be bizarrely renamed Flutter Entertainment, has a deal with a North American fantasy sports company. Our company this week, William Hill, is also in on the act and already has a US presence.
The company is planning to build on its small Nevada-based business. Last August it completed a 25-year partnership with Eldorado Resorts for online and other sports betting. This gives the company access to Eldorado's 23 million customer base. It also has a sports betting agreement with 11 casinos in Mississippi and a casino in West Virginia. To date, its US expansion has cost the company £35m (€41m).
As the US relaxes gaming legislation the UK is tightening it. This is in response to an anti-gambling campaign which encouraged the British government to change the laws on hitherto money-spinning slot machines. The maximum bet has been reduced from £100 to £2 and this will devastate William Hill's business. Already the company was forced to impair the value of its assets by a staggering £880m (€1.32bn).
An additional concern is that up to 900 William Hill shops are now loss-making and closures are expected. The cost of a shop closure is a minimum of £50,000 (€58,700) and that excludes any problems in relation to leases. Further bad news for William Hill was a £6m (€7m) fine for failing to protect customers and breaching anti-money laundering regulations. Following new Australian regulations, management decided to sell its operations down under.
The group's online business is doing well and now accounts for half of total revenues. Last November William Hill bought the Swedish online gambling group Mr Green for £240m (€281m). It operates in 13 markets under the Mr Green and Redbet brands with licenses in Denmark, Italy, Malta, UK and Ireland. Mr Green offers gaming and casino products and has a fast growing sports division.
Last year revenues were up to £1.6bn (€1.88bn) but operating profits fell 15pc. The fall was largely due to the cost of growing the US business and the impact of enhanced due diligence process. Nevertheless, online business continues to do well and the acquisition of the Swedish online operation is a sensible one and should enhance earnings per share.
The company shares are a speculative one and have lost half their value in the last 12 months, now trading at 156p (183c). While the industry is at a crossroads, William Hill's US gamble, while costly, could be very profitable. Some even speculate that the company itself could become a takeover target. However, I wouldn't be rushing to buy the shares at present.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.