Fitch Ratings has assigned
The Outlook is Negative.
Fitch has also assigned 888
The 'BB-' IDR reflects the strong combined business profile of 888 and
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
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
Strong Combined Brand Portfolio: Both WHI and 888 enjoy high brand recognition in the
Safe Gambling Measures Impact: Similar to Flutter and
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,
Potential
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
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
Derivation Summary
888's post-acquisition business profile can be compared with Flutter's (BBB-/Negative) and
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
Post-acquisition, 888 is slightly larger but also more leveraged than
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
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 '
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
The group's liquidity and financial flexibility is adequate for the rating, given additional liquidity from a fully undrawn revolving credit facility of
Issuer Profile
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