888 seeks to reduce debt and fast-track William Hill synergies with ‘deliver and de-lever’ strategy
888 has vowed to take an “extremely disciplined approach” to capital allocation in the coming years as it attempts to reduce its debt leverage to less than 3.5x by 2025.
That target, among others, will be presented to investors later today (29 November) at 888’s Capital Markets Day in London, where the operator’s leadership team is expected to outline its updated strategy and priorities for the years ahead.
New financial targets for 2025 include annual revenue of £2bn, an adjusted EBITDA margin of more than 23% and adjusted EPS of at least 35p.Crucially, 888 will also set out its strategy for integrating William Hill’s non-US assets, which it eventually acquired from Caesars Entertainment in July 2022 for £1.95bn.
The deal was first agreed for £2.2bn in September 2021, after some 18 months of market growth following the onset of the Covid-19 pandemic.
For reference, 888’s share price hit an all-time high of more than 450p in September 2021, while today it stands at little more than 100p. At that time, Caesars’ share price was also more than double what it is today.
As macroeconomic conditions declined towards the end of 2021, the price of the acquisition was reduced by £250m, but still left 888 with significant debts as conditions worsened and the cost of capital began to rise.
Other factors at play, including rising inflation and energy costs, have since combined to put additional pressure on the business.
As a result, 888 intends to accelerate the integration of William Hill’s operations and bring forward the expected cost synergies resulting from the deal.
Thus far, the William Hill and 888 brands have continued to operate via multiple teams and platforms, while the brands are also in direct competition with each other in several markets, resulting in a lower profit margin for 888 than for other operators.
The integration of William Hill’s operations will therefore be a key strategic priority for 888 – in addition to improved focus on its key markets – in order to create a more streamlined and efficient business.
In the coming weeks, the firm said, it may look to access debt capital markets and use the proceeds to repay up to £347m of bank loans related to the acquisition.
It will also increase its pre-tax cost synergy target from £100m to £150m, of which some £34m is expected to come from capital expenditure-related synergies (previously £15m).Peel Hunt: “Refinancing some expensive debt would be a relatively easy early win, otherwise 888 Holdings has something of a slog ahead to deliver on the integration.”
888 is also aiming to accelerate the realisation of operating cost synergies, hoping to bring about some £87m in 2023, revised up from a previous target of £54m.
“As a newly combined business we have significant scope for improving our operating model and delivering efficiencies,” said 888 CEO Itai Pazner.
“Over the next two years we plan to fully integrate our business – creating a bigger, stronger and better organisation with higher profit margins.
“We are focused on building a customer-led business with a portfolio of world class brands that provide complementary offerings, supporting our ambitions to drive market share growth in some of the most attractive betting and gaming markets in the world.
888 CEO Itai Pazner: “Over the next two years we plan to fully integrate our business – creating a bigger, stronger and better organisation with higher profit margins.”
“This will be enabled by a scalable, unified proprietary technology stack that will underpin our product and content leadership focus.”
Following the release of 888’s financial and strategic targets, investment bank Peel Hunt reiterated its Buy rating for the stock and previously issued target price of 210p.
“Refinancing some expensive debt would be a relatively easy early win, otherwise 888 Holdings has something of a slog ahead to deliver on the integration,” said Peel Hunt analyst Ivor Jones.
Peel Hunt’s note to investors was titled: Down Three-Nil at half time. Inspirational team talk needed.
The London-based brokerage said the new strategy sounded plausible, but would be “considerably easier to put into an Excel model than to deliver in the real world over the next three years”.
“However, we are confident of a typically punchy presentation today and eventual success,” Jones added.
888’s guidance for the full year 2022 remains unchanged. The company expects to generate pro-forma revenue of some £1.85bn and adjusted EBITDA between £305m and £315m.
Peel Hunt has retained its FY23E EPS forecast but has since increased its FY25E EPS forecast from 30p to 36.4p, in line with 888’s target of at least 35p.
