When 888 Holdings and Rank Group withdrew their joint “ménage à trois” bid for William Hill, there was speculation that the two disappointed suitors might themselves pursue a simpler two-way marriage. No longer. Itai Frieberger, chief executive of 888, declared yesterday that such a deal was “off the agenda”.
Not that being swatted away by William Hill has soured him or his 48 per cent shareholder, the Shaked family, to M&A opportunities. On the contrary, the 888 boss insists that “the door is open to any potential deal” that would benefit investors and acknowledges that William Hill is “a great operator” and that the industrial logic of a combination with Britain’s biggest bookmaker “remains intact”.
Whereas in the past 888 was regarded as an M&A target — Ladbrokes and, last year, William Hill have made abortive approaches — the company’s confidence after five straight years of growth means that the odds have swung in its favour.
The key to its strong financial performance is its ownership of its own technology, in contrast with most of the big boys who buy in their technology requirements from external providers. Indeed, Mr Frieberger describes 888 as being “less a gaming company and more a tech hub”.
Yesterday’s half-year results, achieved despite the distractions of the William Hill bid, show that organic growth remains the key growth driver. Revenue was up 19 per cent to $262 million, up 22 per cent at constant currency and a slight acceleration on the 20 per cent reported at the end of March. Leading the way with a 31 per cent increase was casino. From a smaller base, sports betting grew even faster thanks to Euro 2016 tournament.
The UK, Spain and Italy remain the company’s core markets and Britain accounts for 46 per cent of total revenues, although the post-Brexit weakness of the pound will cost it about $10 million of earnings. With the emphasis for quoted gambling companies increasingly on regulated markets, the proportion of 888’s revenues from unregulated markets fell from 42 per cent to 37 per cent year on year and Mr Frieberger says that in five years’ time he expects the “vast majority, maybe 100 per cent” of revenues to come from regulated markets. That is comforting for investors.
MY ADVICE Buy
WHY M&A opportunity and organic growth make telling combination
The Gym Group
Investors who bought into The Gym Group at the 195p float price in November were sitting on a healthy profit within five months as the shares raced to a 40 per cent premium. Since April the share price has lost its form, however, dipping briefly below the launch price after the Brexit vote and bobbing around unconvincingly since.
Yesterday’s half-year results should reassure investors that the story they bought into remains unchanged. The low-cost fitness group opened six new gyms in the first half, taking it to 80 clubs and putting it on track to meet its full-year target of 15 to 20 sites. Revenues grew by 25.1 per cent to £36.1 million and underlying earnings leapt by 35.2 per cent to £11.5 million. It is paying a maiden interim dividend of 0.25p.
Its expansion plans will probably push up net debt from £2.5 million to about £9 million at the year end, although Richard Darwin, its chief financial officer, says the rollout will be self-funding from next year. The group, which has trimmed average cost per club from £1.5 million to £1.35 million, charges an average of £16 a month, with revenue per member increasing by 1.6 per cent.
With established midmarket operators suffering, the signs are that The Gym Group and its low-cost rivals Pure Gym and Xercise4Less are opening up a gap on the field. Indeed, The Gym Group is understood to have agreed the purchase of four clubs in a carve-up of Fitness First. With capacity to double or triple the number of UK clubs and an eventual move into northern Europe down the line, the future looks rosy.
MY ADVICE Hold
WHY Trading is strong and rollout potential is impressive
Punch Taverns
Net debt of 6.6 times underlying earnings would not normally be an excuse for a celebratory pint but with Punch Taverns it’s all relative. This time last year the ratio was 7.2 times while before its painful £2.4 billion debt restructuring in 2014 it was an eye-watering 11 times.
The £225 million cut in net debt over the past 12 months follows the completion of a strategic disposal programme. The tenanted pub company collected £99 million from the sale of its Matthew Clark stake, another £83 million from sales of property and land plus £53 million from non-core pubs.
Yesterday’s full-year trading update shows that the group is continuing to put its past woes behind it. Average profit per pub grew by 4 per cent with like-for-like net income across its core estate up 1 per cent — a slowdown on the 1.6 per cent reported in the first half, but a second consecutive year of growth is not to be sniffed at.
Although the shares rose 2.4 per cent to 97½p, that is still well below the 137p they touched last November, while the equity value of less than £220 million is still dwarfed by its net debt burden of £1.2 billion.
MY ADVICE Hold
WHY Patience may eventually be rewarded
And finally . . .
A final little twist in the Poundland bid saga as Elliott Capital Advisors, the activist investor that raised the stakes in the SABMiller takeover, upped its holding in the discount retailer from 18.5 per cent to 22.7 per cent. Although Elliott could block next week’s shareholder vote on Poundland’s takeover by Steinhoff, the South African retailer, one analyst described the purchase at about 225p a share, just below the 227p offer price, as a move to pocket a further small profit. “It’s gilding the lily,” he said.
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