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Entain’s potential merger with MGM is not as simple as investors may hope


Entain PLC (LON:ENT) has poured cold water over a potential bid from US partner MGM Resorts International (NYSE:MGM) but such is the interest in the US sports betting and i-gaming market that this story is far from over.

After confirming that MGM had proposed a potential all-share takeover at a price equivalent to 1,383p per share, the company until recently known as GVC Holdings saw its shares surge 28% to 1,449.5p by late on Monday, suggesting investors believe the Las Vegas casino operator will come back with another roll of the dice.

With M&A action in the sector on a hot streak, with Paddy Power and Betfair owner Flutter Entertainment PLC (LON:FLTR) last year completing a GBP10bn merger with North America-focused The Stars Group (TSG), William Hill agreeing to a takeover from MGM’s rival Caesars Entertainment Inc (NASDAQ:CZR) and last month Flutter back in action as it shelled out US$4.2bn to up its stake in US business FanDuel, MGM’s move is not a big surprise.

READ: Flutter says it’s winning US gambling race but bookies know favourites don’t always win

Like punters flocking around a casino craps table where the punter has a golden arm, global gambling companies have swarmed into the USA over the past two and a half years since the supreme court lifted a previous ban on legal wagering.

With digital dollar signs spinning in their eye-sockets, the likes of Caesars and MGM have partnered up with UK bookmaking buddies for their expertise and tech nous in the fields of sports betting and online casino games.

Entain, which owns Ladbrokes, Coral, Bwin.Party and Sportingbet, and MGM said the BetMGM brand, which uses Entain’s digital online platform and is promoted by the jointly owned Roar Digital joint venture, was on course to be providing sports betting and i-gaming in 11 states by the end of last month. Entain’s net revenues Stateside are expected to come in around US$150-160mln for 2020.

The FTSE 100 group’s new boss Shay Segev, after he stepped last summer, set out a long-term target to reach a market share in the US of 15-20%, with the company believing the US online betting market could be worth $20bn by 2024 and more than US$50bn over the long term, thanks to ongoing deregulation.

Not so simple

While it is understandable why MGM wants the business all to itself, analyst Nicholas Hyett at Hargreaves Lansdown said a deal is less straight forward than the bid for William Hill.

“William Hill can be neatly separated into a large UK business and a fledgling US operation. By comparison Entain is a far more global and more integrated operation – operating online gaming sites around the world as well as a high street estate,” he said.

“That makes folding the non-US operations into MGM or spinning them off separately a far greater challenge.”

MGM’s offer of 0.6 of its shares for each Entain share pointed to a 22% premium based on both company’s closing share prices at the end of December.

This is a relatively modest premium by recent standards, as some analysts noted, and makes the Entain’s board’s statement that the proposal was “significantly undervaluing” the company, understandable.

Analysts at broker Shore Capital noted that the proposed offer price was around eight to nine times underlying profits (EBITDA) for the business and a further circa-GBP3.5bn valuation for Entain’s 50% stake in BetMGM.

“We would see such a multiple as significantly undervaluing the prospects for the group, both from its core operations and most notably the US opportunity, especially when set against peers,” the Shore analysts said.

With Entain shareholder’s set to own 41.5% of the combined group under the current proposal and a significant amount of debt already on the US group’s balance sheet, Hyett said a higher price “may prove too much for MGM shareholders to swallow”, adding that while the offer may have undervalued the group, “a future bid is far from guaranteed”.

Saying they “struggle to understand the strategic rationale” of a full merger, the analysts at Shore Cap suggested instead there was potential for a “partial spin-off its US sports betting and iGaming assets in the US to help unlock the value in the opportunity and providing the additional firepower to fund expansion in this highly attractive market”.

While acknowledging that “big questions remain” over whether MGM will seek to integrate Entain’s UK and European assets or spin these off, or even than the current US partnership could be at risk if no deal is struck, Harry Barnick at Third Bridge saw the benefits of a merger.

“Entain has a rich history of operating sports books and this will be highly attractive to MGM as it looks to grow its sports betting offering in the US. MGM will also be keen to cross-sell its existing land-based customers into the sports betting offer.

“Key synergies include the cross-sell opportunity from MGM’s land-based casino operations into Entain’s sports betting offer.”

“The acquisition will improve MGM’s chances of competing with power-houses DraftKings and FanDuel, as well as offsetting the competitive threat from Caesars acquisition of William Hill.”

Other players at the table?

The MGM bid also raises the possibility of potential deals elsewhere in the sector for other US operators fearing they may get left behind.

Other UK-listed online gaming names include i-gaming specialist 888 Holdings (LON:888), which has a longstanding consumer-facing and white-label B2B business in the US but has been questioned about the lack of a heavyweight partner.

The FTSE 250-listed group grew US revenue 90% in the first half of last year, thanks to B2C growth in New Jersey as well as strong performances from B2B partners.

Elsewhere there is Playtech PLC (LON:PTEC), which offers a different angle into the US market as it is a provider of casino and other games for the likes of Entain and its rivals.

The company confirmed last summer that it was in talks to sell off its financial arm, which might make it more attractive to a potential US gambling industry buyer.

In the first half of last year, the group reported growing US momentum, with the receipt of a New Jersey online casino product license and an expected Stateside launch with partner bet365 in the second half, with further license applications underway and plans to increase investment.

Another FTSE 250 name, online bingo and casino games operator Gamesys Group PLC (LON:GYS), said its US operations had maintained “good momentum” with healthy double-digit top line growth.

Similar is Gaming Realms PLC (LON:GMR), a maker of mobile bingo games, including its popular Slingo game.

In its latest update, Gaming Realms said it has applied for licenses in Pennsylvania and Michigan in the US and hopes to launch in these states during the first half of 2021.

A niche way into the sector is Webis Holdings PLC (LON:WEB), which has seen its shares rise over 600% over the past two years.

It owns the racetrack totalisator, which also operates harness race meetings at the Cal Expo racetrack in California.

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