Caesars Entertainment CZR 3.43% is canny to turn to British bookmaker William Hill for an answer to online-gambling sensation DraftKings. DKNG 8.54% If the deal eventually leads to a spinoff at a tech valuation, it will look even cannier.
The U.S. casino operator on Monday announced a $3.7 billion bid for William Hill, with which it already runs a joint venture in the fast-growing U.S. sports-betting market. On Friday, in response to a Bloomberg report, William Hill had said it was in separate talks with both Caesars and fund manager Apollo, prompting a 43% surge in its stock price as investors positioned themselves for a bidding war.
Far from confirming these expectations, Caesars’ offer on Monday all but quashed hopes of a competitive auction for William Hill. It said the U.K. company’s directors had expressed an intention to recommend its offer to shareholders. This is perhaps because they had little choice: Caesars also hinted it would pull the plug on the all-important joint venture, which relies on its regulatory licenses, if William Hill was sold to anyone else. The stock fell back 12% on Monday to just above Caesars’ offer price.
Even if the U.K. company’s shareholders get a sweetener, Caesars seems likely to walk away with a valuable asset at a more reasonable price than is available in its back yard. William Hill betting shops are a ubiquitous fixture of the British high street, but Caesars made clear it was mostly interested in the U.S. business, in which it already owns a 20% stake.
The basic arrangement of this joint venture is that Caesars brings the properties and regulatory approvals, while William Hill provides the technology. Until this year’s Covid-19 disruptions, the unit was growing fast as more states legalized sports betting.
Americans’ appetite for gambling has bounced back, particularly online, and investors’ appetite for a new breed of gambling stocks with it. The enterprise value of DraftKings, another sports-betting specialist, has swelled to $19.2 billion since it went public this spring—a valuation reminiscent of the software sector.
As a purely online player, DraftKings may deserve a premium. Even so, Caesars doesn’t need to make aggressive assumptions about the future market share of the William Hill business to make a $3.7 billion outlay look modest by comparison—whatever the company’s other divisions end up fetching. The market is in flux, but brokerage Macquarie assumes a 10% market share in sports betting for the Caesars-William Hill joint venture, compared with 20% for DraftKings and 28% for sector peer Flutter Entertainment FLTR -0.18% (enterprise value: $28.2 billion).
If today’s high valuations for sports-betting companies persist, Caesars might eventually benefit from listing the William Hill business, together with its nascent online casino, as a separate vehicle. Caesars Chief Executive Tom Reeghas talked openly about the need to excavate attractive businesses that are currently buried within a lower-growth vehicle. He also could use the cash a spin-out could raise: The merger of Caesars with Eldorado Resorts, which closed in July, saddled the company with debt just in time for cash flows to collapse, particularly from Las Vegas.
This potential end goal is still some way away. Caesars doesn’t expect to complete the William Hill acquisition until the second half of next year. And it will need to convince the U.K. company’s shareholders that it isn’t giving them a raw deal. If Caesars plays the field right, though, it could end up with a lot more chips than it is putting down.
Write to Stephen Wilmot at [email protected]
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