Shares in all three companies rose this morning, after yesterday's Sunday Times reported that Rank and 888 have formed a consortium to prepare a bid for William Hill. The story was confirmed by early morning statements from all three companies.
William Hill was the biggest riser when markets opened, with the firm's shares up by 7% at the time of writing. However, the high street bookmaker's management played it cool this morning, warning investors that "it is not clear that a combination of William Hill with 888 and Rank will enhance William Hill's strategic positioning or deliver superior value..."
Reports over the weekend suggest that discussions have been ongoing for a number of weeks. This suggests to me that boardroom disagreement about William Hill's response to the approach by Rank and 888 may be one reason for the sudden departure of William Hill's chief executive last week.
Does the deal make sense?
The gambling sector is seeing a wave of big mergers. Paddy Power recently merged with Betfair, while Ladbrokes is in the middle of a deal to combine with Gala Coral.
The logic of combining 888, Rank and William Hill is fairly obvious. William Hill and Rank Group have a strong set of sports betting and gambling brands, with a comprehensive high street presence.
888 Holdings is a fast-growing online operator that should be able to accelerate William Hill's disappointing online performance. Combining the three firms could cut costs, improve scale and provide faster online growth.
The suggested combination isn't entirely new, either. William Hill tried to buy 888 Holdings last year for £700m, but couldn't persuade key 888 shareholders to accept the offer.
How would the deal work?
There's no word yet on the likely value or structure of the deal. What seems to be likely is that Rank and 888 Holdings would merge before buying William Hill, which is a much larger company.
In my opinion, William Hill shareholders would probably be looking for an offer of at least 400p. The firm's share price has flirted with this level a number of times over the last five years. However, earnings forecasts for the bookmaker have fallen by 17% over the last year, putting the group in a relatively weak negotiating position.
Earnings are rising strongly at both Rank and 888, and William Hill shareholders could be attracted by an opportunity to lock in a decent profit.
What should we do?
Talks are still at an early stage. There's no guarantee that Rank and 888 will make a bid for William Hill.
Even after recent gains, shares in all three companies look quite reasonably valued and offer decent dividend yields. In my view, the best plan for shareholders in these firms is to hold on and wait for more concrete news. I don't see any reason to take action now.
Given that the deal may not happen, I think investors considering buying should focus on the most attractive standalone companies. In my view these are 888 and Rank, although I'd want to look more closely at both before making a decision.
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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Paddy Power Betfair. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.