OREANDA-NEWS. Fitch: UK Gaming M&A Shows Drive to Merge Online, High Street London M&A activity in the UK gaming sector, including this week's rejected bid for William Hill, highlights a clear trend towards combining traditional betting shops with online operators, Fitch Ratings says. We believe this type of deal can boost growth by accelerating investment in online platforms and giving those platforms access to a large pool of relatively loyal high-street customers. But execution risk is likely to be high due to the different cultures and the combined businesses are likely to be more highly leveraged than the main high-street bookmakers.

In the latest announcement, bookmaker William Hill said on Tuesday that it had rejected a GBP3.2bn takeover offer from 888 Holdings and The Rank Group. This follows the rejection of its own GBP700m bid for 888 last year. Ladbrokes is merging with Gala Coral and Paddy Power recently merged with online gambling operator Betfair.

All the deals and proposed transactions involve the combination of a largely traditional bookmaker with a more online-focussed business. For Ladbrokes, we believe the enlarged group will have a strengthened business risk profile due to a broader business mix and improved geographic diversification. But the company's 'BB' rating is on Rating Watch Negative pending completion of the deal. The Negative Watch reflects a likely weaker financial profile after the merger and several significant challenges for the sector, including fierce competition and a government focus on tighter regulation and higher taxes, which we expect to continue.

These pressures are likely to have been a major factor in the recent attempts by William Hill and 888 to buy each other. So too is the high cost of developing an online offering, which requires both significant initial capex and continued investment to develop new games and keep customers coming back.

But the most recent approach by 888 in conjunction with Rank would face particularly high execution risks because it involves combining three companies and because all three have different cultures and little cross-over between their business models. William Hill has a large portfolio of shops and a strong sports-betting operation, but is weak online. 888 is purely online, with a large business-to-business arm, while Rank operates bingo halls and casinos.