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Flutter merger with Stars Group offers “unparalleled opportunity” says RBC, however GVC remains top pick in gambling sector

In a sector note, the Canadian bank said Flutter's tie-up had a "high chance" of completing, with the new entity estimated by some to be worth at least £10bn

Flutter Entertainment PLC - Flutter merger with Stars Group offers “unparalleled opportunity” says RBC, however GVC remains top pick in gambling sector
William Hill was rated less positively at 'sector perform' as RBC said it had been "outplayed" in a consolidating market

A merger between Paddy Power owner Flutter Entertainment PLC (LON:FLTR) and Canadian gambling giant The Stars Group Inc (TSE:TSGI) offers an “unparalleled opportunity” for share price upside, according to analysts at RBC.

In a sector note initiating a number of big-cap and mid-cap gambling groups, the Canadian firm kicked off coverage of Flutter with an ‘outperform’ rating and 9,000p target price, saying there is a “high chance of the deal completing”, after which there will be “a huge revenue opportunity from cross-selling” between Flutter’s sports betting operation and TSGI’s online poker base.

READ: Flutter agrees PokerStars merger to become world’s largest online gaming operator

Provided it satisfies regulators, once the merger completes the new group will be the world’s largest online betting and gaming operator with combined revenues of £3.8bn, based on last year's figures, and total market capitalisation of at least £10bn.

Flutter will hold 54.6% on the enlarged group, while Stars Group will own 45.4%. Management is also predicting that around £140mln of costs could be removed, although analysts said this is likely to be higher.

As of mid-morning trading on Monday, Flutter shares are currently trading 0.9% higher at 7,850p, although this is a 12.8% discount to RBC’s target.

GVC still top pick

While the Flutter deal was cited as the biggest opportunity in the sector, RBC said Ladbrokes owner GVC Holdings PLC (LON:GVC), which it initiated at ‘outperform’ with a 1,060p price target, was its ‘top pick’ among the gambling companies.

Analysts said the FTSE 250 firm has “consistently outperformed peers in the growth of its online business, supported by well-integrated acquisitions and its proprietary tech platform”.

READ: GVC nudges up profit guidance despite softer quarter

They added that the company had an “excellent track record of integrating acquisitions” and more bolt-ons were expected following the acquisition of Ladbrokes Coral in March last year.

They added that despite a recent sell-off in the stock following a £12mln sale by GVC’s chief executive, Kenneth Alexander, who has since bought back £5mln, the shares now offered “excellent value”.

GVC’s shares are 0.8% higher at 884.6p, a 16.5% discount to RBC’s target.

William Hill faces uphill struggle

The only UK firm not to receive an ‘outperform’ rating was William Hill PLC (LON:WMH), which RBC said had been “outplayed in a consolidating market” and would need to execute its current turnaround plan effectively in order to catch up.

“WMH is the smallest group, with the fewest brands, having been left behind in a consolidating industry where scale really does matter”, RBC said, initiating the firm with a ‘sector perform’ rating and a target price of 220p.

READ: William Hill CEO Philip Bowcock to step down as bookmaker adjusts to regulatory crackdown

However, the bank’s analysts said they had been prevented from turning negative on the stock due to William Hill’s “significant” opportunity in the US through its tie-up with multi-billion-dollar American casino operator Eldorado Resorts.

RBC expects the company’s US operation will account for 44% of pre-tax earnings (EBIT) by 2023, although there could be further upside if Eldorado completes its merger with Nevada-based casino group Caesars Entertainment Corporation (NASDAQ:CZR).

The UK’s gambling giants have been scrambling to break into the American market after a US Supreme Court decision last May opened the door to potentially legalise sports betting across the country by overturning a federal law banning the practice.

Moves across the Atlantic have also been encouraged by risks that the UK could be on the cusp of tightening gambling regulations further after the government announced last year that the maximum stake for Fixed Odds Betting Terminals (FOBTs) would be cut to £2 per spin from £100, putting a dent in the revenue generation of betting shops across the country.

William Hill’s shares are currently 2% lower at 197.4p, a 10% discount to RBC’s target.

Quick facts: Flutter Entertainment PLC

Price: 10725 GBX

Market: LSE
Market Cap: £16.58 billion

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