Description

Investment Thesis

William Hill (WMH LSE £1.8275), is one of the largest sports bookmakers in the world.  I believe WMH is positioned to grow substantially over the next few years as US states rollout legalized sports betting. WMH’s stock has declined over the last year due to legislative changes in England, which negatively affected its UK betting parlors by reducing the maximum allowable bet from £100 to £2. While the business in England probably won’t return to previous levels, WMH is expanding into new markets across Europe and the US. The US Supreme Court’s overturning of the Professional and Amateur Sports Protection Act (“PASPA”) of 1992, has begun the great rush by tax starved states to open up the sports betting market. Sports betting legality will be decided state by state. So far, the laws in some legalized sports betting states have positioned WMH as a monopoly, and others in a more competitive stance. While competition varies by state, WMH’s partnerships give them access to more than 50% of US states. Additionally, WMH’s exclusive deal with Eldorado Resorts (“ERI”) will benefit greatly from Eldorado’s closing of its announced acquisition of Caesars Entertainment Corp (“CZR”) sometime in 2020.  As some states require online sites to partner with Casinos, WMH has strategically positioned itself perfectly to take advantage of the growing market in the U.S.  My target price for WMH is £2.77 in 2020 based on a 9 times Enterprise Value(“EV”)/EBITDA multiple.

Overview of William Hill

WMH was started in 1934 and has been one of the UK’s premier betting companies ever since. WMH is now comprised of three businesses units.  They are as follows:

1. Online, which totals about 39% of the WMH’s net revenue, is comprised of WMH’s digital presence in all forms of gaming outside of the US.  The Company’s online revenue is split evenly between sports betting and online casino type gaming using many different brand names including Mr. Green, Redbet and William Hill.  WMH has significant market share in most of Europe through its original business and recently completed acquisitions. WMH’s European online division is growing quickly. The acquisition of Mr. Green, which closed in February 2019, furthered WMH’s reach to an additional 13 European countries. WMH’s online websites do business in over 100 countries.  In the U.K, WMH is the third largest online book maker by revenue, and it is consistently investing in strengthening its platforms.

2. UK Retail generates most of WMH’s revenue through its approximately 2,300 local betting shops that accept sports bets and have Fixed Odds Betting Terminals (“FOBTs”).  WMH’s UK retail operation currently totals about 56% of the Company’s net revenue and has about 27% market share.

3. US is comprised of a large sports bookmaking operation in Nevada and numerous partnerships across other US states where gaming is legalized.  It encompasses both online and physical gaming. The Company positioned itself in the early part of the millennium in Nevada to benefit from the potential overturning of PASPA.

WMH traded at its 5 year high at £421.90 in 2015 based on the retail revenue generated by its FOBTs and the possibility of US sports betting being legalized.   Going forward as WMH executes its plan to close unprofitable retail locations, its revenue will shift towards online gambling and WMH US. 

FOBT Law Change

FOBTs offer different types of games that have fixed odds, primarily roulette.  The British government deemed FOBTs as a source of the gambling problem within the UK. FOBT’s were dubbed the” crack of gambling” for allowing users to lose relatively large amounts of money very quickly, with 14% of its users considered problem gamblers. To combat this problem the British government decided to lower the maximum bet from £100 to £2, which negatively affected the industry and WMH’s revenue and profitability. 

FOBTs were responsible for roughly half of WMH’s retail revenue. WMH had climbed to the top of the U.K retail business with 2,300 stores, thus making it extremely vulnerable to this legislation. WMH has guided that it will shutter up to 700 stores as a result. The company has been working with its landlords to reduce rent in order to minimize closures. The results of these negotiations won’t be apparent until 2020, but one can certainly expect a significant drop in the revenue from FOBT’s.  As per WMH’s second half earnings call, the Company is seeing a shift into sports betting from FOBTs with a 17% increase in average betting.

WMH is not alone in suffering from FOBT laws in England and trying to expand with the U.S market. Flutter Entertainment (FLTR LSE £6488) owns and operates multiple book making web sites and retails stores in the U.K, U.S and Australia. In the UK Flutter has 626 Paddy Power Betting Shops. Both FLTR and WMH are suffering from the recent FOBT law, but WMH is the clear leader in this sector and thus a bigger loser with the betting limit change. WMH has announced the possible closure of up to 700 stores, while FLTR doesn’t expect to close any at this moment. This is partly due to FLTR shops being less reliant on FOBT and its smaller number of stores. 

Eldorado relationship

WMH partnered with Eldorado in September 2018. This is the language from ERI’s September 30, 2019 10-Q;

“William Hill US will become the Company’s exclusive sports betting operator for a period of 25 years at its properties in jurisdictions where sports betting is legal. The Company will also work with William Hill US to leverage its licenses to operate mobile and online sports wagering operations in the United States. At the closing of the transactions contemplated by the agreement, the Company will receive a 20% equity stake in William Hill US as well as ordinary shares of William Hill PLC with a value of $50.0 million (based on the 60 day volume-weighted average trading price of William Hill PLC shares ending on September 4, 2018). Pursuant to the terms of the agreement, the Company will have the opportunity to sell its equity in William Hill US following a public offering of William Hill US or through a conversion of the 20% equity stake to William Hill PLC shares or cash at William Hill’s discretion after five years.” 

This partnership was beneficial for both parties as WMH gained access to Eldorado’s client base, and Eldorado partnered with one of the world’s top sports book operators. This partnership was especially beneficial to WMH for two reasons.  First, it gives WMH access to US states that require a physical betting establishment to operate online betting sites. Second it required ERI to be exclusive to WMH, but not for WMH to be exclusive to ERI. Eldorado also has partnered with the Stars group, but this deal has no impact on WMH as the Stars deal was for online casino games. Eldorado’s recent deal with Caesars strengthens WMH’s original deal as they will be the exclusive bookmaker of the US’s largest casino chain when the deal closes in 2020.  Caesars is currently partnered with Scientific games and 888 and these companies will have access to Caesars’ markets though overtime they will be phased out and WMH will take over due to its exclusivity with ERI. This positions WMH as the clear winner in US sports bookmaking.

Stock Price Drop

Over the last 12 months (starting June 16th, 2018), WMH’s stock has dropped over 50% due to two reasons. First, the UK betting limit reduction legislation passing in 2018 went into effect on April 1, 2019 and reduced the maximum bet on FOBTs from £100 to £2. FOBTs have a guaranteed win based on money wagered and the odds on the bet made. The reduction in the maximum bet reduced the rate at which gamblers can lose money on the FOBTs and reduced WMH’s profits. Second, WHM along with its British bookmaker competitors have invested heavily in the development of the U.S sports betting market. Developing infrastructure in the U.S has taken large amounts of capital and the market has taken longer than many pundits expected to develop. 

WMH and the U.S. Sports Betting Market

WMH began its expansion into the U.S back in 2011 with the acquisition of Brandywine bookmaking, American Wagering, and The Cal Neva Sportsbook division. These acquisitions drove WMH US to 32% market share (by revenue) in Nevada sportsbooks.  When PASPA was overturned in May of 2018, WMH was already well positioned as a bookmaker in the U.S. Through its partnerships, WMH US is now active in 17 states with 3 more states due to come on in the second half of 2019 as shown by the slide below.

There are approximately 240 million adults of gambling age in the US.  Currently, sports betting is approved in states that have an adult population of 79 million, implying that only 33% of the US population is currently covered.  In the states where it is now legal, only Nevada has a mature market. The illegal US sports betting market is estimated to be approximately $150 billion according to the American Gaming Association (“AGA”).  To determine how big of an opportunity legalized sports betting is for WMH I have included a slide from WMH’s recent presentation. Using only currently approved states and an average bet per adult of between $34 and $67 per year, the current market size should be about $2.5 billion to $4.9 billion.  See chart below.

However, using the AGA’s $150 billion estimated illegal market size couple with 240 million US adults implies an average annual bet of $625 per US adult.  This would imply that as legal sports betting is approved, the current approved states could generate upwards of nearly $50 billion in total wagers. WMH currently has about a 27% share of the legal betting market as shown by the slide below.

WMH is augmented its leading market share in the US by partnering with Eldorado Resorts.  This partnership will allow WMH to run the sports bookmaking operations in all ERI’s land-based casinos as it is legalized within that state.  ERI’s acquisition of Caesars and its exclusivity to WMH, should give WMH dominant market share across the US. WMH is now investing heavily in marketing in legalized states to augment its growth and this spending will increase over time as WMH’s US presence expands with legalization by additional states.  The ERI/Caesar’s combined states are shown below.

Competition in sports betting

Sports bookmaking is a competitive market with high barriers to entry. It has both a retail and online component.  The US market as described above is still nascent and will develop into what I believe will be the largest sports betting market in the world over the next few years.  The UK market for bookmaking is bifurcated between online and retail shops. The retail side will shrink as the FOBT legislation discussed above will lead many shops to close-down.  The UK betting market is led by Ladbrokes-Coral Group which is owned by GVC Holdings (“GVC”) with WMH having second position and FLTR’s Paddy Power/Betfair owning the third spot. For UK online, Bet365 holds first position, Kindred Group’s Unibet is second, GVC’s BWIN is third, Parimatch is fourth and WMH is fifth.  In the European online market there are many competitors including Betsson, Asianlogic LTD (DBA Expekt), Impyrial Holdings (DBA Pinnacle Sports), FLTR, WMH and GVC. Market share differs from country to country with WMH having decent market share in many western European markets through its Mr Green acquisition.

FanDuel vs WMH in the US

WMH and its direct competitor FLTR are taking different approaches with their approach to the US market. WMH US partnered with Eldorado Casino group to obtain access to states while retaining the WMH brand. FLTR bought online daily fantasy sports betting site FanDuel group. WMH believes that its market share within Nevada has generated enough buzz to negate the need for rebranding. FLTR’s acquisition of FanDuel gave them access to FanDuel’s previous bettors along with a strong brand name with US consumers. FanDuel Group owns FanDuel, FanDuel Sportsbook, Betfair and horse betting site TVG. FanDuel will have access to states as they legalize sports betting through its partnerships with Boyd gaming and further access through Boyd’s partnership with MGM. Both Platforms are primed for success online, but WMH’s deal with Eldorado will give them access to the Brick and Mortar locations of the soon to be largest U.S casino chain.  

Risks

• WMH is subject to the legislation around gambling, as evidenced by the decrease of maximum bet on FOBT’s in the UK. Additionally, WMH must wait for each state government to create laws on sports betting legalization, which could negatively affect operating margins in the near term.  Finally, tax jurisdictions often look to raise taxes on gambling companies as a source of revenue.

• As a large technology company who deals with large sums of cash, WMH could be a victim of Cyber Crime. 

• Competition. WMH is directly competing with numerous companies for market share within the US, UK and Europe

• Bad Luck, as WMH operates a sportsbook there is a degree of luck in the outcomes of events.  This risk decreases as WMH spreads globally and increases the diversity of its sports books.

Finances

WMH has historically traded at between 9 and 11 times trailing 12 months Enterprise Value(“EV”)/EBITDA. WMH currently trades at a multiple of 8 times and 7 times projected 2019 and 2020 EV/EBITDA, respectively. The decrease retail revenue caused by the FOBT law is still to be determined but should stabilize in the next 12 months. As the market adjusts to this revenue and profitability decrease, WMH’s stock price should begin to reflect the growth of the UK and Europe online and US businesses.  I believe that sometime in 2020, Investors will begin to focus on the potential for significant cash flows from these businesses as the US legalized betting market matures on a national basis. I have included a simple model below (excluding the Caesars impact) using analyst estimates to layout WMH’s prospects for the next few years. It is still too early to understand how the US sports betting will translate into revenues and profitability for WMH, so I decided to use analyst estimates in this case as an expert view.

Conclusion

WMH’s stock fell in price due to the UK’s FOBT legal betting decrease, the slower than expected rollout of US betting laws and the Company’s investment in marketing to drive US sports betting growth. Over the next 12 months WMH’s revenue in the UK betting shop market will stabilize and investors can then focus on the growth of its online businesses and the U.S sports betting market. I believe that WMH will become an attractive takeover target due to WMH’s large market share in the UK retail market, its strong online betting presence in Europe and the UK and its strong position in the US sports betting market. If WMH were to trade at the low end of its historical 9 to 11 times EV/EBITDA multiple in 2020, then its share price could reach £277 for a 56% gain.

Catalyst

1.  Increased US sports betting due to state by state adoption.

2.  Increased US sports betting due to demand from consumers.

3.  Normalization of income in UK from recent regulation.

4. M&A activity in the sports betting space at levels significantly above where WMH trades.