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Webis Holdings - worth a gamble at the bookies

By Cynical Bear | Saturday 4 March 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

With Cheltenham Festival around the corner, I thought I’d throw caution to the wind this weekend, cast my cynical nature to one side, and come up with a couple of cheeky punts that I think may pay off. What could be more fitting for my first than the gambling business, Webis Holdings (WEB).

Just in case anyone thinks I’m going slightly insane, I should start by saying that I largely agree with the analysis on this stock by Gary Newman from earlier this year, which one can see HERE and HERE. It is a subscale gambling business and struggles to generate cash, not helped by the fact that as it grows it has to tie up additional cash in various deposits and bonds and, as a result, has recently needed additional funding from Jim Mellon, the 63% shareholder.

Last week’s interims did show decent growth at the gross profit level off 44% to $2.07 million; however, this was exceeded by the operating expenses and so the business had a small operational loss.

Not very exciting I know but a combination of factors have drawn me in here.

First, there was a very clear statement within the interims as follows:

“The Board is very aware that consolidation and the increasing benefits of economies of scale are the watchwords of the online gambling market. In addition, such consolidation could be beneficial to the WatchandWager business, which has demonstrated significant growth but operates under a heavier burden of fixed costs in proportion to its larger competitors. The Board is also aware that its USA licences, together with its established operations and business relationships, are a significant asset to any business, notwithstanding the improved financial performance. As a result, the Board continues to assess all strategic opportunities for the Group's future for the benefit of shareholders.”

The Board has basically put the ‘For Sale’ sign up.

Secondly, one can see that what the Chairman has said is true. The consolidation in the gaming space is going on all around from the big high street combinations of Paddy Power / Betfair (PPB) and Ladbrokes / Coral (LCL) to the recent offer by Kindred for 32 Red (TTR) as well as the sale last month of Netplay to Bettson. This latter deal was a perfect example of a subscale operator being snaffled up by a larger player in much the same way as I can see Webis being acquired.

Thirdly, I couldn’t help but notice the various announcements by Sportech (SPO) last week, most notably the potential sale of The Football Pools for £83 million and its focus on US gaming.

Now, I wonder where Sportech could invest some of those winnings?

Webis would be the perfect acquisition for it and a price of, say, 2.5p equating to a deal value of £10 million would hardly scratch the surface of its war chest.

So there you go; I’m not a huge fan of the business but I do think it is growing and would be an attractive M&A target for someone, particularly Sportech and so see this as a special situation type play.

The stock has come off following its interims last week and currently trades at 1.625p in the middle of a seemingly significant spread. If one could buy around that price, I would suggest that there is a possible 50% return or more within a year by way of being acquired.

I also think the downside is protected to a certain extent as imagine Jim Mellon will continue to support the business and, if it drops much lower, I could see him buying out the minority shareholders himself around the current price.

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