888 Holdings (LSE:888) slid in early morning trading on Monday after gaining last week. The gaming stock had jumped nearly 30% on Thursday morning following the announcement of a renegotiated acquisition of William Hill’s non-US business.
However, the gains were not sustained and it lost some of its progress on Thursday afternoon. It dipped a further 6% on Friday and 5% in early morning trading on Monday. As I write, the stock sits at 204p a share, down from 244p on Thursday morning.
Why so much volatility?
On Thursday, 888 announced that it had renegotiated a cheaper deal for the acquisition of William Hill’s non-US business from American casino operator Caesars Entertainment. The deal had previously been valued at £2.2bn. The new figure is between £1.95bn and £2.05bn.
The renegotiated price reflects a “change in the macroeconomic and regulatory environment,” with a review of William Hill currently being undertaken by the UK Gambling Commission, 888 said. The announcement sent the share price soaring.
888 performance
Like its peers, 888 experienced a stellar 2020 as the pandemic and several lockdowns saw a surge in online gaming. Revenue in 2020 reached $849m, up from $560m in 2019. The staggering growth appeared unsustainable but revenue grew by 15% to a record $980.1m in 2021. Profits also grew at an impressive rate. The firm said profit before tax surged 205% to $81.3m in the year ended December 31.
However, 2021 wasn’t all good. Fourth quarter revenue fell 16% as Covid-19 curbs were lifted and policy changes in the Netherlands led to its exit from the market. The fall was largely in line with expectations.
William Hill acquisition
Analysts have been fairly upbeat about the acquisition, which is predicted to quadruple the size of the betting firm. The renegotiated deal and the new financing plan should reduce some of the risk involved in the takeover too. Under the previously agreed terms, 888 was aiming to raise £500m in equity to pay for the deal. Shareholders will vote for the William Hill deal in May, it is understood. The purchase would therefore be closed in June.
Should I buy?
888 has delivered impressive growth in recent years, partially on the back of extraordinary operating conditions during the pandemic. It can also be considered one of the most profitable companies on the index. Over the past six years, return on capital employed — an important metric for measuring profitability — has averaged 30%.
However, I still don’t think the stock looks overly cheap. At Friday’s closing price, the price-to-earnings ratio was around 14.7. For me this is problematic because I’m concerned about the long-term trends in the gambling sector. There’s certainly a risk that policy changes could force companies to stop certain operations. But I think that’s unlikely given the tax revenue generated by the industry.
I’m more concerned about whether gaming firms can continue to their impressive performance post-pandemic. With no Covid curbs, I’m sure many people will find more enjoyable ways to spend their money.
I’m not buying now but I’ll be keeping an eye on this stock as well as on general trends in the sector.
