TEXT-S&P affirms William Hill 'BB+' rating;outlook stable

Mon Jan 7, 2013 7:57am EST

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Rationale

The affirmation follows William Hill's announcement of the proposed debt-funded acquisition of certain parts of online sports betting company Sportingbet PLC (not rated) for a total cash consideration of GBP454 million. It reflects our view that the transaction will not alter William Hill's "satisfactory" business risk and "significant" financial risk profiles. In our view, the proposed transaction will enhance the company's international diversification and online gaming presence. However, the proposed transaction will not substantially reduce William Hill's high concentration on its core U.K. market, where it currently generates more than 90% of its revenues.

We already factor into the ratings on William Hill the company's willingness to undertake debt-funded acquisitions, and we believe that the proposed transaction is in line with management's acquisitive strategy. William Hill has deleveraged over recent years by using its strong operating cash flows. Therefore, we believe that it has the necessary financial flexibility to fund the proposed acquisition with debt, without weakening its credit ratios beyond levels that we consider commensurate with the company's "significant" financial risk profile as our criteria define the term. These ratios include Standard & Poor's-adjusted debt to EBITDA of not more than 4x.

In our base-case scenario, on completion of the proposed acquisition, we forecast William Hill's pro forma revenues of close to GBP1.4 billion and adjusted EBITDA of about GBP400 million. We consider that the proposed transaction is in line with management's strategy to diversify outside its core U.K. market, grow its online business, and focus on regulated markets. We assess William Hill's management and governance score as "satisfactory" as defined in our criteria.

The proposed acquisition will include Sportingbet's Australian operations as well as a call option to buy Sportingbet's Spanish business. William Hill will undertake the proposed acquisition in partnership with holding company GVC Holdings PLC (not rated). Sportingbet's Australian business is a leading online bookmaker currently operating under the Sportingbet and Centrebet brands in the regulated and fast-growing Australian gambling market. The proposed acquisition is conditional on various shareholder and regulatory approvals. Providing that the necessary approvals are obtained, the acquisition will likely close by March 31, 2013.

In 2013, we estimate that William Hill will generate more than one-third of total revenues and EBITDA from its online operations. The company's focus on the fast-growing online segment may expose it to the U.K. government's planned point of consumption tax for online gambling operators to be introduced in December 2014. Therefore, we believe the company's adjusted EBITDA margin will likely continue to contract over the next three years from its current level of close to 30%, before eventually stabilizing at about 25%.

For the financial year to Dec. 31, 2013--following completion of the proposed transaction--we anticipate that William Hill's adjusted debt to EBITDA will be about 3x and funds from operations (FFO) to debt about 25%. We believe the company is reasonably well-placed to withstand ongoing macroeconomic pressures in the U.K., supported by its large network of well-located retail betting shops, well-known brand, growing online business, and increasing international presence.

In addition, we note that William Hill could exercise its call option on the 29% share in William Hill Online owned by online gaming software company Playtech Ltd. (not rated) in the first quarter of 2013. If William Hill funds such a transaction entirely with debt, this could bring its adjusted debt-to-EBITDA ratio close to, or even beyond, the 4x level commensurate with its current financial risk profile in 2013. However, in light of management's willingness to preserve the current ratings, we believe the company would fund such a transaction in a way that maintains the current financial risk profile in line with the 'BB+' rating.

Liquidity

We assess William Hill's liquidity position as "adequate" under our criteria, and calculate that sources should exceed uses by more than 1.2x over the next 12 months. Our assessment of William Hill's liquidity position is supported by sufficient cash on hand, solid cash flows, and access to debt facilities to support operating needs over the near term.

As of Dec. 31, 2012, William Hill's liquidity was supported by:

-- Unrestricted cash balances of about GBP80 million;

-- Undrawn committed bank lines of about GBP420 million;

-- Our forecast of free operating cash flow of about GBP200 million in 2012;

-- A proposed 18-month bridging facility of GBP225 million; and

-- Good covenant headroom, which we believe could withstand a 30% drop in EBITDA.

As of Dec. 31, 2012, we estimate William Hill's liquidity needs over the next 12 months to be about GBP640 million. These needs consist of:

-- Capital expenditures of about GBP70 million;

-- Dividend payments of about GBP70 million; and

-- Costs related to the Sportingbet acquisition of about GBP500 million.

Our liquidity assessment does not take into account funding requirements for the potential acquisition of the 29% share in William Hill Online in the first quarter of 2013. This is because we do not exclude the possibility of further changes to the capital structure if the potential transaction is completed.

Recovery analysis

The issue rating on the GBP300 million 7.125% senior unsecured notes due November 2016, issued by William Hill, is 'BB+', in line with the corporate credit rating. The recovery rating on the notes is '3', indicating our expectation of meaningful (50%-70%) recovery for creditors in the event of a payment default.

We value William Hill on a going-concern basis, given our view of its "satisfactory" business risk profile, strong market position, well-known brand, cash-generative capability, and the high barriers to entry that result from operating in a highly regulated sector.

Our simulated default scenario projects a default in 2016, due to deteriorating cash flow generation and aggressive financial policies, leading to a potential inability to refinance the GBP300 million unsecured notes that mature in 2016.

For the purposes of our recovery analysis, we assume that William Hill would extend its unsecured GBP550 million revolving credit facility (RCF) due 2015 by one year. At the hypothetical point of default in 2016, our estimate of the stressed enterprise value is about GBP650 million, which is equivalent to 6.25x EBITDA.

If the company raises additional debt to fund the acquisition of certain Sportingbet assets as planned, we anticipate that recovery prospects for the existing senior unsecured noteholders would decrease slightly, but would still be in line with our expectations of 50%-70% recovery in an event of default. We assume that the terms of any new debt facilities will be in line with those of the existing RCF.

Other potential limitations on recovery could arise if there are possible additional changes to the capital structure (which consists of only unsecured debt instruments) by the time of default; if noteholders' claims cease to rank pari passu with those of lenders under the GBP550 million RCF, due to potentially ineffective negative pledge provisions; and if additional debt is raised by William Hill Online, which does not guarantee the rated notes.

Outlook

The stable outlook reflects our view that William Hill will be able to maintain revenue growth throughout the economic cycle thanks to growth in its online business and from gaming machines, and due to its recession-resilient retail business model. Despite the continuing decline in the company's EBITDA margin, we consider that William Hill is reasonably well-placed to withstand ongoing macroeconomic pressures in the U.K., supported by a large network of well-located betting shops, strong brand, and increasing international diversity.

We could lower the rating if debt-funded acquisitions or adverse tax or regulatory developments cause William Hill's earnings capacity to decline faster than we currently anticipate; if substantial shareholder returns or acquisitions increase adjusted debt to EBITDA to more than 4x; or if the upcoming need to fund ongoing external acquisitions with debt weakens liquidity to below what we assess as "adequate" under our criteria.

Rating upside is limited by management's focus on external growth and appetite for debt-funded acquisitions. A positive movement in the rating is likely to be linked to the adoption of a more conservative financial policy and a commitment from William Hill to maintain adjusted debt to EBITDA of less than 3x and FFO to debt of more than 25%. We could also take a positive rating action if the company's strong operating performance continues, coupled with increasing diversification of revenue sources, resulting in a sustainably improved business risk profile.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed

William Hill PLC

Corporate Credit Rating BB+/Stable/--

Senior Unsecured Debt BB+

Recovery Rating 3

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