Analyst: Bally’s Inviting More Risk Than Reward With Evoke Deal

• Bally’s confirmed it’s in talks to potentially acquire Evoke
• Analyst says integration could be a “distraction”
• Risk-reward “skewed slightly negative” for Bally’s

Bally’s has confirmed it is in talks to acquire struggling Evoke (EIHDF), though one analyst is already sounding alarms over the potential deal’s heavy risks.

In an April 20 note to clients, Stifel analyst Jeffrey Stantial points out that while Athens-listed Bally’s Intralot has a long history of deal-making, integrating the William Hill owner into its portfolio could be “an operating distraction” as Bally’s attempts to navigate a new UK gaming regulatory regime, which includes higher taxes.

While enhanced scale should help with mitigation efforts, we see risk the industry as a whole is underestimating potential share loss to the unregulated market as onshore operators pull back on marketing and promos posing risk to out-year estimates,” observes the analyst.

Stantial also notes that Evoke brands, including 888 and William Hill, have been shedding awareness and loyalty among UK consumers for several years, indicating there are potential complexities for Bally’s in a takeover of the company as attempts to execute an Evoke turnaround in the UK.

Bally’s Leverage Likely to Increase

Bally’s all-stock offer for Evoke values the target at about 67.5 cents a share and while that’s not a massive sum on the surface, Evoke’s debt would likely increase the buyer’s leverage if a deal were reached.

The analyst said Bally’s can work within those confines because Evoke is likely to be additive to free cash flow, but the target’s debt burden could be a somewhat thorny issue as the combined company works through the UK tax situation.

Bally’s is no stranger to so-called rescue missions and it’s familiar with the UK regulatory climate, but the regional casino side of the business is grappling with debt issues of its own, indicating the would-be buyer has ample work ahead of it on the debt reduction front.

Evoke Juice May Not Be Worth the Squeeze

Under current management, Bally’s has rarely shied away from compelling deals or turnaround stories, but it may want to tread carefully with Evoke.

After all, there’s are reasons why interested in the Mr. Green owner has been limited since the company announced a plan to explore strategic alternatives last December.

“We believe risk-reward around a potential Evoke acquisition is wide and skewed slightly negative given uncertainty around U.K. tax hike impact and feasibility of ambitious mitigation targets,” concludes Stantial.

“Given financial challenges for Evoke, a challenging U.K. operating environment, and reportedly few competitive suitors, we see it likely Evoke remains a share donor in the U.K. with BALY better suited competing for share organically vs. buying, in our view.”