Bookmaker William Hill (WMH) is raising £375 million in a rights issue to help gain full control of its online business. It is buying out 29% partner Playtech (PTEC) in a £424 million deal, as widely expected by the market following previous disagreements between the two parties. The scale of the rights issue and acquisition price have both raised eyebrows in the City with one analyst calling them 'excessive'.

Playtech is the big winner from today's activities. It has made 3.5 times its original investment in the business, called William Hill Online. Its share of profits has been €140 million, excluding software royalties. Playtech will continue to offer its software to William Hill under licence. The disposal must be completed by the end of April, upon which Playtech will have a new slug of cash to spend on acquisitions, joint ventures and potentially a special dividend for shareholders.

The market has applauded William Hill's decision to exercise the option on buying out Playtech, sending its shares up 7.1% to 433.5p. The positive market sentiment will have been sweetened by the bookie's full-year results which are also out today. Current trading is strong with underlying group net revenue up 17% for the seven weeks to 19 February. In contrast, Playtech is down 3.5% to 551.5p on its disposal news.


WMH - Comparison Line Chart (Rebased to first)

William Hill's rights issue is priced at 245p in a 2-for-9 offer. The theoretical ex-rights price is 375p or 369p if you adjust for the final dividend that will be paid on 7 June, claims stockbroker Panmure Gordon. Shareholders are getting a 11.2p full-year dividend, slightly less than consensus estimates of 11.3p.

Panmure Gordon had expected William Hill to pay £408 million to buy out Playtech. Irish stockbroker Davy reckoned it would pay £387 million, yet it says the strength of the business being acquired is underpinned by the latest trading.

Online sportsbook amounts staked are 7% ahead of Davy's forecasts 'despite very high gross win margins which should ordinarily depress stake levels,' says analysts David Jennings. He adds: 'It is no wonder that shareholders have already pledged support for the equity raise to come.'

The scale of the rights issue has also exceeded expectations with the bookie raising £75 million more than analysts believe is necessary. One possible reason is a likely desire by management to invest in the online business now that it has complete control.

Shares wrote an article in March 2009 that looked at the impact of rights issues on share prices. We cited research from Morgan Stanley which had examined the 115 largest rights issues in the UK over the previous 15 years. It said that the 'median stock that raised cash equivalent to more than 75% of its market capitalisation outperformed the market by 45% over the next two years and outperformed its sector by 58%'. The bank concluded that the best long-term performers were companies that a) raised a large amount relative to their market cap; b) have performed poorly in the prior year; c) used the cash to repair/strengthen balance sheets.

William Hill's rights issue represents a 'mere' 12.5% of its £3 billion market value and its shares have risen by 93% over the past 12 months. There's no doubt that buying out Playtech is the right move, but William Hill must continue to deliver a stellar performance from its online operations if it is to avoid future criticism about the scale of the rights issue and the acquisition price.

There remains risks to the stock. This month's Budget (20 March) could bring bad news for the bookmaking industry as the gambling sector faces new tax pressures. If gross profits tax is increased to 20%, for example, then William Hill and Ladbrokes could see an 8% reduction in earnings per share (EPS). Then there's the big threat next year to offshore operators that take bets from British punters. The government has expressed plans to tax gambling at the point of consumption from December 2014. A 15% gross profits tax would reduce William Hill's EPS by 21%, says stockbroker Numis.

For now, investors seem undeterred by the threat to the industry as William Hill's shares continue to rise. Davy sums up the situation well: 'This business is heading towards being 50% online in (mostly) regulated markets with a very strong balance sheet and underlying trading that is well ahead of market expectations. A re-rating is justified.'

Issue Date: 01 Mar 2013