Playtech, Ladbrokes and 888

You read it here - HUM4N forecast that Playtech would be acquired and soon afterwards talks were reported. We predicted the acquirer would be a land-based operator and mentioned William Hill. The William Hill Online (WHO) 71/29 joint venture with Playtech contributes nearly 25% of Playtech's profit improving their stock market valuation by about £225m. The value of Playtech's share of the JV is currently £130m equivalent to about 10% of William Hill's total market capitalization.

Reading between the lines of the William Hill 2010 Annual Report (pages 96 and 70) they are currently getting the Playtech software free as part of the joint-venture. If true this might help to explain the larger than expected decline in Playtech poker revenues of 30% during the year. The JV, whilst an excellent deal, might make it difficult for some companies to merge with the company.

Perhaps this is the reason for the reported request to vary the terms of the JV. We thought the primary interest for William Hill would be to buy out the JV and other similar assets like Titan, Winner and poker770 said to be controlled by common shareholders.

The iPoker network and the B2B software business of Playtech we surmised would not be the primary interest in any deal. After all Playtech is a software provider and runs a network of licensees or distributors which use their platforms - this is not William Hill's business model which is a strong brand B2C focused operation. Ladbrokes' business model is very similar to William Hill's. Two of their declared critical success factors are to 'grow a strong digital capability' and 'focus on brand and the consumer.'

An acquisition of 888 would nearly double the size of their digital business and take them past William Hill Online (£308m v £254m in 2010). It would also cost around £200m rather than £1.2bn for Playtech. 888's latest results showed feisty performance with strong marketing of updated and well reviewed products. Most importantly, they own most of their players. 888 could bring critical mass to Ladbrokes' online UK business.

The chart above shows the increase 888 could deliver to Ladbrokes by sector. Hamlet Holdings owners of Harrah's Interactive Entertainment which licensed the Dragonfish platforms - 'a huge deal' Dragonfish said at the time - could also be sniffing around 888 and would probably have leverage if US regulatory issues become an obstacle.

So what's up? Our analyses, published on this site, on the structure of the industry show an inexorable trend to branded operations with consolidation and market fragmentation by regulation putting severe long-term pressure on the platform providing network operators.

The Ongame network will almost certainly be sold to another network operator - it should be of no interest to a branded business but Betfair might be a long-odds outsider if there is a unique product in the deal.  bwin and Giocodigitale sites will not be included and will logically move to the Party platform.

Playtech will have seen the same pressures mounting as evidenced by their below expectation performance in Italy (12% share) and France (2% share) - and the William Hill JV has only two to three years to run leaving them with a capital sum but no more profit share.

Talking with Ladbrokes implies they are seen as an e-gaming company. Positioning themselves as an online gaming ISV with a SAAS model rather than as a e-gaming company would open up the list of potential acquirers enormously - and the JV would not be a problem. It is also a good positioning for Ongame if the product development resources are included and bwin.party does have several product development groups.

Anyway, all of this is just idle speculation. What we suspect is that significant assets are in play, the Ongame network, Playtech and 888Holdings with or without its Dragonfish. Ladbrokes, William Hill and others have the industrial logic and financial resources - we will have to wait to see who buys what.