Hedge Fund Tries to Crash a $4 Billion Casino Game

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When a hedge fund arbitrageur wants to force a bidder to pay more for a takeover, the standard tactic is to rally opposition before shareholders have their say on the deal. Fearful of losing its prey, the aspiring buyer might chuck in a sweetener to secure enough support. Once shareholders have approved a transaction, the opportunity to resist the bid is usually past. That isn’t stopping a U.S. investment firm from having a go.

At the 11th hour, HBK Capital Management is pushing for a rerun of the shareholder vote on Caesars Entertainment Inc.’s 2.9 billion-pound ($4 billion) takeover of joint-venture partner William Hill Plc. The U.S. casino operator’s acquisition had been due to be rubber-stamped in a court hearing at the end of March after William Hill shareholders voted for it in November.

Annulling that poll would obviously open the door to shareholders asking Caesars for a better price, so HBK may not be alone in wanting to reset the process. The deal has so far offered scant opportunity for merger arbitrageurs to earn a return. William Hill shares rapidly shot above 300 pence in September after the company confirmed a Bloomberg News report of interest from buyout firm Apollo Global Management Inc., adding that Caesars was sniffing around too. A deal was then inked with Caesars — but at 272 pence a share.

If the opportunity arose to demand that Caesars pay more, the arguments are easy to imagine: The existing offer looks less generous after a strong equity rally, and shares in Caesars and other gambling stocks have performed especially well in recent months.

But it’s not easy rewinding a deal that’s already got shareholder backing. HBK sees grounds in the way that William Hill has described one critical aspect of its JV agreement: the rights Caesars has to put bidders on a “restricted acquirers” list. If a company on this register then buys William Hill, Caesars can terminate the JV. This risk could be a big deterrent to a gatecrasher. After all, a bidder might not want to buy William Hill if it meant losing the lucrative U.S. partnership with Caesars.

In explaining this, William Hill initially said Caesars could add a “limited” number of names to the list. In the formal deal circular, it added that Caesars could amend the list only “periodically.” HBK argues that this document’s rather imprecise wording led the market to believe that no other bid for William Hill was possible, assuming Caesars could promptly add any challenger that surfaced.

In fact, Caesars can amend the list only every six months, and insert six names at most. It named Apollo when it tied up its deal. So it’s theoretically possible a second challenger could have got a transaction done before Caesars was again able to update the list. As it is, no other firm bid materialized to prove the point.

Better investor communication probably wouldn’t have changed the fact that shareholders had only the Caesars offer on the table. Whether a misunderstanding of the blocking powers drove the 87% vote in favor of the deal is hard to know. Nevertheless, shareholders would surely have preferred to have more detailed information about them as a matter of principle.

If HBK persuades the court not to finalize the takeover, the ramifications will go beyond a likely row over the right price for William Hill. U.K. bids using the same “scheme of arrangement” process (a shareholder vote sanctioned by a court) could become subject to many more challenges claiming deficient documentation. Hedge funds tried and failed to block a scheme for a takeover of Inmarsat in 2019. A victory this time would embolden the activist community. For bidders and their targets, it would be a colossal warning that less is not more when it comes to describing takeover deals to shareholders.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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