On its own, the deal is certainly not the biggest seen in the sector. That $607m can be more than covered by MGM’s money in the bank.
LeoVegas generated revenues of €391.2m in 2021 and €43.3m of EBITDA. Accompanying the news Monday, LeoVegas also released its first-quarter earnings showing revenues for the three-month period up 2% to €98.5m and adjusted EBITDA up 35% to €14.1m.
The offer price of SEK61 (Swedish Krona) comes at a premium of 44% to the closing price of ~SEK42 last Friday. The multiple is a fairly generous 12 times EBITDA.
Dragged down by regulation
These 2021 figures are not the full story for LeoVegas. Revenue growth in 2021 of 1% would have been 16% without the deleterious effect of German regulation during the year. Likewise, the company said Q1 revenues were 9% ahead without the Netherlands.
Asked on Monday about the successive regulatory challenges to have beset the European betting and gaming operators in recent years, Hagman admitted the industry “has some challenges from time to time.”
“My humble opinion is that it is better for those companies to be in the private sector rather than the listed environment,” Hagman said. “Continuing to grow in different countries means things will happen. It’s hard to forecast what will happen.”
As Paul Leyland at Regulus Partners pointed out in his response to the news, LeoVegas does come with some “spicy” dot-com revenue.
“This may require either a lot of tidying up on a relatively fixed cost base or a lot of explaining down the line,” Leyland said.
“MGM will rapidly become invested in the operational present and regulatory future of many markets which represent a day’s trading in a Vegas casino. This is not the kind of compliance U.S. companies or US regulators are used to.”
The elephant in the room
On Monday’s earnings call, MGM CEO BillHornbuckle stressed that despite the move to acquire a European competitor, the relationship with Entain, its 50/50 joint venture partner in BetMGM, has “never been better.”
“On Entain, we tried a year ago to buy them. I don’t think a whole lot has changed. We said then – and I will repeat now – we wanted to diversify our revenues as a company.”
Speculation previous to the LeoVegas news was that if MGM were to make any further move in the digital arena, it would be to buyout – in one way or another – its partner. After DraftKings’ audacious bid for Entain collapsed late last year, the clearest solution for MGM appeared to be a straight bid for the UK-listed firm.
That MGM has chosen a different route now comes as a surprise.
“The various corporate jigsaw pieces that have attempted to solve the inherent instability of JVs have all failed, suggesting that this far more simple mechanism might be ‘instead’,” Leyland said.
Hornbuckle made clear on Monday that MGM would be closing out LeoVegas’ minuscule presence in New Jersey. But the company does compete with Entain in various European markets and also in Ontario where, as Leyland points out, it will be going head-to-head with multiple BetMGM and Entain brands.
LeoVegas’ earnings 2021 by geography
Nordics 50%.
Rest of Europe (including Germany, the Netherlands and the UK) 29%
Rest of world 21%
Unregulated business: ~23%.
Entain’s business units
Retail – UK, Ireland, Italy, Belgium. Revenues of £791.1bn in 2021.
Online – UK, Australia, Brazil, Germany, Spain, Italy, Portugal, Canada. Revenues of £3.01bn in 2021.
US – BetMGM JV. GGR in 2021 of $800m.
Unregulated business: “Almost” 100% from “regulated or regulating” markets.
Tensions between partners
The relationship between MGM and Entain seems destined to become more fraught.
“MGM will very quickly develop the wherewithal to provide Entain with very unpalatable alternatives,” Leyland said. “MGM seems set to own its own digital capability on a global basis one way or another, meaning the LeoVegas bid looks like a much more strategic play than an operational bolt-on. It is therefore unlikely the story will end here.”
The delta between this deal and any prospective deal from the entirety of Entain is also a key consideration point. At a similar 44% premium, for instance, a buyout of Entain would still cost £12.5bn ($15.7bn), even at the current depressed share price levels.
Leyland has already identified execution risk as the biggest impediment to MGM making online a success. Arguably, that risk would increase exponentially if they were adding Entain to their revenue mix rather than the much smaller LeoVegas.
Pros and cons for MGM
As with any deal of this nature, there’s an inherent amount of risk and reward:
Pros
- LeoVegas comes with an easily digestible 900-person workforce with key skills in online gaming and betting.
- The $607m comes from current cash reserves.
- LeoVegas has its own PAM and various relationships including Kambi for sports betting.
Cons
- The unregulated elements of LeoVegas’ revenues are sizeable.
- Germany, a big market for LeoVegas, is a basket case for online gaming.
- LeoVegas is a tier 2 brand in all but its ‘home’ market of Sweden.
What comes with the deal
There is a lot to like about this deal for MGM. LeoVegas comes with its own PAM, a small online gaming development studio, a sportsbook in Expekt, an ongoing relationship with Kambi and its U.S. ambitions are still formative enough to quickly kill.
It also has live dealer offerings, which Hornbuckle mentioned specifically during Monday’s earnings call.
“It’s a space in a place we want to continue to push into. This will give us one of the vehicles to do that,” Hornbuckle said. “And if you think about it, and you all understand some of the valuations in the industry when it relates to live dealer providers, at our core, it’s our stores that represent what they do.”
“If we can’t do this in a fun and compelling and exciting way, then shame on us.”
Analysts reactions
The early reaction from the U.S. analysts was positive. David Katz at Jefferies said the deal was “consistent with our view that MGM would use its capital resources to acquire growth, and growth in mobile is more attractive than most land-based opportunities, in our view.”
“Moreover, this does not preclude MGM from pursuing additional growth should opportunities present themselves,” Katz wrote. “We expect a modestly positive reaction in the shares.”
Carlo Santarelli at Deutsche Bank said he believed the acquisition was at a “reasonable price, regardless of the regulatory overhangs that exist in Europe at present, will be well received.”
