Fitch Ratings has assigned 888 Holdings Plc (888) a final Long-Term Issuer Default Rating (IDR) of 'BB-'.

The Outlook is Negative.

Fitch has also assigned 888 Acquisitions LLC's and 888 Acquisitions Limited's debt issues final senior secured ratings of 'BB+' with Recovery Ratings of 'RR2'.

The 'BB-' IDR reflects the strong combined business profile of 888 and William Hill International (WHI) with a widely recognised online and retail brand portfolio plus high potential for synergies. This is balanced against a weak combined financial profile.

The group has limited geographic diversification of revenue and a fairly low share of sports-betting operations versus gaming activities but enjoys strong brand recognition. Its financial profile is weak for the 'BB' rating category, due to high leverage and low free cash flow (FCF) generating capacity. The ability to increase business scale on an EBITDA basis and adherence to a conservative financial policy that prioritises FCF and deleveraging will be critical for the rating trajectory.

The Negative Outlook reflects some potential for adverse changes to the regulatory environment in the core market and a degree of execution risk related to synergies with WHI, which could delay the deleveraging trajectory. Fitch expects 888 to be able to deleverage through organic business growth despite current downside risks, supported by the group's financial policy with a medium-term net debt-to-EBITDA target of 3x. Our rating case also assumes integration synergies at a rate slightly slower than forecast by management, with up to a USD90 million positive effect on EBITDA in 2025. Failure to achieve synergies, or operating underperformance, in particular due to worse-than-expected regulatory challenges, especially in the UK, would be negative for the credit profile.

Key Rating Drivers

Business Scale Boosted by WHI: Larger scale and competitive market positions are key business factors underpinning the rating. We expect that WHI's acquisition will allow 888 to increase its revenue almost threefold from 2021 to USD2.4 billion by 2023 and USD2.8 billion by 2025. WHI's stronger forecast EBITDAR margin should also lift EBITDAR for the merged group. We expect 888 to reach USD0.45 billion EBITDAR by 2025, up from USD123 million in 2021.

Strong Combined Brand Portfolio: Both WHI and 888 enjoy high brand recognition in the UK market. We view established brands as less vulnerable to possible regulatory restrictions on advertising in gaming. Our forecast assumes that 888 and WHI will maintain their market positions, supported by marketing synergies and combined technological and business expertise.

Safe Gambling Measures Impact: Similar to Flutter and Entain, 888 started introducing responsible gaming measures in 2021, ahead of the release of the UK Gaming Act Review whitepaper. The more recently introduced measures include ones that materially impact revenue and profitability - bet limits in online casinos and affordability checks for deposit limits. This will affect profitability in 2022. We now forecast pro forma EBITDAR margin of 15.7% compared with our previous forecast of 16.8%. However, we now also assume a more muted impact from new regulation in 2023 and a smoother deleveraging trend for 888.

High Pro-Forma Leverage: The WHI acquisition was funded primarily by debt, resulting in high pro-forma leverage (assuming full-year contribution from WHI in 2023) for its rating, versus 888's debt-free position before the merger. Our rating case assumes that adjusted net debt/EBITDAR will stay above 6.5x in 2023, before gradually decreasing to 6.0x by 2025. We do not incorporate any other debt-funded acquisitions in our rating case, and further growth in debt, or even little sign of deleveraging, could negatively affect 888's rating. Capitalised leases add between 0.1x and 0.3x to our lease-adjusted leverage.

FCF Affected by Debt Service: We forecast 888's pro-forma profitability to be lower than that of close peers, Flutter Entertainment plc and Entain plc, and to be under pressure from high interest expenses. We expect the latter to result in negative low-single digit FCF in 2022-2023, as well as funds from operations fixed-charge coverage ratios below 2.0x for 2022-2024. Higher-than-expected capex in core or prospective markets, or sizeable dividends could lead to sustained negative FCF for 888, adversely affecting its credit profile. However, full realisation of identified synergies and the ability to maintain strong profitability despite regulatory challenges would be beneficial for 888's rating over the medium term.

Potential UK Regulatory Risk: Roughly two-thirds of combined business's revenue will be generated from the UK market, which is a substantial increase from 888's 40% pre-merger. This exposes the group to the upcoming UK Gambling Act Review relative to close peers. Despite the proactive implementation of responsible gaming measures in 2021 and 2022, we expect a further 150bp year-on-year decrease in gross margin in the UK online market in 2023 for 888.

Higher Diversification Into Betting: We expect the combined business to generate 35%-40% of revenue from sports betting (including retail) versus an estimated 13% for 888 pre-merger. We see sports betting as a potentially higher-growth segment, both in demand and lower regulatory risk. Our forecasts assume that exposure to sports betting will allow 888 to grow revenue organically in mid-single digits.

Limited US Exposure: 888 launched its sports betting business in the US through a partnership with Sports Illustrated in June 2021. Although we expect this business to see CAGR of over 50% in 2022-2025, we do not expect its share to exceed 5%-6% of consolidated revenue by 2025. Given the hefty investments going into the US market by most market participants, which still yield mostly negative operating profits, we expect 888's small exposure to that market to be only marginally detrimental to consolidated profitability.

ESG Under Scrutiny: 888 has an ESG Relevance Score of '4' for customer welfare - fair messaging, privacy & data security due to increasing regulatory scrutiny of the sector, particularly in the UK, greater awareness around social implications of gaming addiction and an increasing focus on responsible gaming. Although we have reflected conservative assumptions on UK online sales and profitability, ahead of the UK Online Gambling Review, more punitive legislation than envisaged could put the ratings under pressure, given 888's high leverage profile.

Derivation Summary

888's post-acquisition business profile can be compared with Flutter's (BBB-/Negative) and Entain's (BB/Positive), given their similar portfolio of strong brands, but smaller scale and slightly weaker geographical and product diversification.

However, 888's financial profile over the first two to three years of merger is expected to be weaker, with higher leverage and lower profitability, translating into their rating differential. All three entities have high exposure to the UK market and are vulnerable to regulatory risk, which is factored into their current ratings.

Post-acquisition, 888 is slightly larger but also more leveraged than Allwyn International a.s. (Allwyn, previously SAZKA Group a.s.; BB-/Stable). Its organic growth potential of online gaming and betting is offset by higher regulatory risk than Allwyn's lottery business. Allwyn's strong FCF generation is mitigated by high acquisitive growth (including using cash flows to increase stakes in existing businesses) and a more complex group structure. The resulting credit profiles are broadly comparable, resulting in the same rating.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Six months of WHI contribution to 888's consolidated results in 2022

Revenue to slightly decrease in 2022 on a pro-forma basis, followed by low-to-mid single-digit growth in 2023-2025

EBITDA margin of 14%-15% (EBITDAR around 16%) over the next three years, with a trough in 2022 due to responsible gaming measures taken by the company, in line with peers, in anticipation of the publication of the Gaming Act Review.

Fitch's methodology uses an 8x multiple on the rent expense for the calculation of the lease debt amount as the assets are located in developed markets. We note the average length of WHI leases is shorter than 3.5 years, and lease contracts provide break clauses giving additional operational flexibility for an earlier exit or refinancing

No dividends over the forecast period

Neutral working-capital changes to 2025

Capex at 4%-5% of revenue to 2025

Synergies reaching USD90 million at EBITDA level and USD20 million for capex (i.e. reduced joint capex) by 2025

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Evidence of the EBITDAR margin being maintained above 15% following successful integration of the acquired business

Sustained positive low single-digit FCF margin (after dividends)

Evidence of adjusted net debt/EBITDAR trending towards 5.0x

FFO fixed charge cover above 2.8x on a sustained basis

Factors that could individually or collectively, lead to the Outlook being revised to Stable:

Increased visibility over regulation in key markets and successful integration of the acquired business

Neutral to positive FCF (after dividends)

Visibility that management is adhering to a move conservative financial policy, as stated in its leverage goal, with adjusted net debt/EBITDAR trending below 6.5x on a sustained basis

Factors that could, individually or collectively, lead to negative rating action/downgrade:

EBITDAR margin below 12% due to increased regulatory pressure or failure to effectively integrate the acquired business

Neutral or negative FCF (after dividends)

Adjusted net debt/EBITDAR remaining above 6.5x on a sustained basis

FFO fixed charge cover maintained below 2.0x

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Adequate Liquidity: Fitch expects satisfactory liquidity for the combined group on the back of stable cash on balance sheet of around USD200 million over the next three years. Fitch restricts USD125 million of cash for working-capital swings, winnings and jackpots, leaving readily available cash of around USD70 million-USD130 million over the rating horizon.

The group's liquidity and financial flexibility is adequate for the rating, given additional liquidity from a fully undrawn revolving credit facility of GBP150 million, and the absence of material debt repayments expected over the next seven years. However, the group's fixed charge cover ratio is rather weak for the rating as we expect operating EBITDAR to interest paid plus rents of 1.7x in 2023, before improving slightly towards 2025.

Issuer Profile

Gibraltar-based gaming operator 888 is a global online gaming operator (mainly casino and poker) in Europe and north America.

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