William Hill remains a 'sell' for Berenberg as deal hurdles loom

While William Hill shares have been whipped higher by Rank and 888's preliminary takeover approach, Berenberg believes the bid will be unsuccessful and maintained its 'sell' rating on the bookmaker.

Over the weekend, £800m-valued online specialist 888 Holdings and £900m land-based bingo and casino group Rank confirmed they had formed a consortium to formalise a bid for £2.7bn William Hill.

Though the consortium have not set out a price, City rumours put the price at around £3bn for Hills' equity, roughly 360p a share, which would be a 15% upside on Friday’s closing price and circa 20% above the average price of William Hill over the past three months.

While, Berenberg sees the potential for around £65m of synergies from a merger, it also eyes "several uncertainties looming" that cast doubt on a successful deal.

Firstly, the deal is complicated as it entails the merger of three relatively large operators and secondly, the structure of the deal is thought likely to be critical as William Hill’s shareholders are likely to want a cash offer rather than a mix of cash and shares, which would require the bidders to raise £2bn of cash.

The reason why a cash offer is preferred is that a cash-and-shares deal "would increase exposure of William Hill’s shareholders to unregulated markets via 888 and to retail activities via Rank, neither of which are attractive".

As it stands, analyst Roberta Ciaccia said he sees William Hill's current fundamentals as "weak", with poor earnings momentum and "a road to recovery longer than consensus currently expects".

"We did not think William Hill could be a takeover target for any competitor given its size, and we certainly did not expect two players to form a bidding consortium. We think the stock will bounce today, but we also believe that the likelihood the deal actually goes through is not high."

Ciaccia said he would take profit on any bounce of the share price, and maintained his standalone price target for WMH at 240p per share.