The top line
- Late last night, UK time, Entain released a further statement clarifying the terms of the offer received from DraftKings. It said that an initial offer of £25 a share was rejected and that a renewed offer was received on 19 September worth £28 a share or ~$22.4bn.
- This offer consisted of 630p in cash and the remainder in DraftKings shares and represented a 46.2% premium to the share price on 20 September.
- Entain said it will “carefully consider the proposal” and a further announcement will be made as and when appropriate.
- Informed sources suggest a number of scenarios, with the two most likely being either DraftKings buys Entain and then sells BetMGM stake, with a subsequent licensing of tech.
- Alternatively, the bid flushes out another bid from MGM with either/both a higher offer and a larger cash element.
- Other scenarios – DraftKings partnering with MGM and DraftKings buying out MGM from the JV are seen as being less likely.
- MGM also released a statement noting it would have to give consent to any deal but that it would engage with DraftKings and Entain to “find a solution to the exclusivity arrangements which meets all parties’ objectives.”
- As per UK takeover rules, a firm offer would need to be lodged by 19 October.
Three-legged race: This is the second bid for Entain this year following MGM’s unsuccessful £8bn/$11bn offer in January. That ultimately failed on valuation grounds and on the face of it the circa 46% premium involved in this approach from DraftKings will at least satisfy that criteria. However, the near 20% rise in the Entain share price suggests UK investors were thinking a rival bid would emerge from MGM.
Money to cash: That calculus would change if it were effectively a joint bid. Analysts at Jefferies – who have been speculating for a while that MGM would go back in with a renewed Entain offer – point out MGM has $11.7bn on cash in the balance sheet following recent CityCenter and MGM Growth Properties deals. They suggest a lower range valuation of BetMGM to be ~$8bn; upper valuation range would be ~$14.2bn.
You snooze, you lose: Previously, MGM has made much of its interest in potentially owning more of BetMGM and just last week at a JP Morgan investor conference CEO Bill Hornbuckle said:
“As much as we critique ourselves for giving up half of the business, we are number two in the country… Having seen the business and understood it more clearly… we love the business and yes, we would like more of it,” Hornbuckle added at the time.
Buckle up: Hornbuckle also didn’t demur when it was suggested that buying Entain was a “perpetual opportunity” that was there to be taken at MGM’s leisure – a suggestion that now looks somewhat complacent. Similarly, speaking the week before CFO Jonathan Halkyard said the JV was “built to last”. “It is exclusive, it is long-term. It is truly 50/50.” Analysts at Truist suggested “it makes more sense for them to just buy Entain’s 50% share of BetMGM.” “MGM owning all of its online business would be a clear long-term positive, in our view, though price would obviously be an important factor,” Truist added.
The problem, however, is where the ownership of the tech resides. Noted Jefferies: “This presents the notion of how BetMGM continues its momentum through either buying or developing any capabilities that are no longer provided.”
Diluting juice: The value of DraftKings’ prize would also be debatable. While it would gain a profitable international business – with the kicker of a very strong gaming operation – which could accelerate its move towards profitability, it would come at the expense of lower growth rates and a more complicated – and less exciting – story for investors who, as the analysts at Eilers & Krejcik have pointed out, have bought into an online “pure-play narrative” and a suitably high multiple on future earnings.
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