MGM wants to own BetMGM outright but will be patient as the UK group struggles with shareholder impatience.
The news that Entain’s CEO Jette Nygaard-Andersen is under considerable pressure from a number of activist investors over the group’s performance since she was appointed in 2021 is a further illustration of the importance of tech ownership for any operator aspiring to be a major player in the U.S online sports betting market.
The acquisition-driven expansion strategy Entain has embarked on since Nygaard-Andersen’s arrival has had a number of knock-on effects, on both the UK group and MGM, its joint venture partner in BetMGM.
Not only has it occupied Entain minds as its leadership has driven a total of 11 acquisitions of varying sizes and success since 2021, it has also meant that MGM has not been able to make any progress on its longstanding aim of acquiring Entain’s 50% of BetMGM.
MGM’s desire to own BetMGM outright is well known and the group’s senior executives have always maintained that they consider the tech stack to be exclusive to them and working independently of Entain, with U.S. offices in New Jersey and Nevada.
Ground control
The latest news doesn’t really alter the deck as far as MGM’s plans go, but full ownership of the tech stack is important for brands with leadership aspirations.
Having total control over the tech stack enables operators to promote (or withdraw) betting markets as and when they want. It also gives them a complete handle over trading, risk management, marketing and product development.
In the highly competitive world of OSB, whether a mobile interface or product functionality is updated in three months rather than 12 can have major repercussions on sportsbooks’ customer acquisition campaigns, forecasts and revenues.
For all that, BetMGM has performed well since its launch in 2021. Third quarter net gaming revenues (NGR) were up 15% on an annual basis to $458m and excluding New York, the brand has an overall betting and gaming market share of 18% and 26% when looking only at online casino market share. Full year NGR is set to be at the upper end of $1.8bn-$2bn guidance with EBITDA-positive status forecast for 2023.
Time is on my side
Looking at the current goings on at Entain, there has been renewed (and half-hearted) talk of MGM reentering the fray with a view to acquire the UK group. This is highly unlikely and MGM will probably wait for the UK group to be sold and make its move to only buy the outstanding 50% of the BetMGM joint venture that Entain holds.
While MGM can afford to be patient and might even end up buying Entain’s half of BetMGM for what turns out to be a good price compared to 2021, the last time the two groups were involved in M&A talks, the whole saga has exposed it to events beyond its control.
Nygaard-Andersen’s appointment in January 2021 followed the shock departure of Shay Segev to DAZN just as Entain was in the midst of negotiations over a potential sale to MGM. Since then, Nygaard-Andersen and her senior executives have carried out a total of 11 acquisitions that have left industry observers wondering whether all of them were necessary and if the prices Entain paid for some of them were commensurate with their market shares or real potential.
A quick run through of some of those deals shows Entain paid £80m for the esports bookmaker Unikrn in 2021, the brand has since been considerably pared back, while Dutch operator BetCity was acquired for €550m barely a year after launching and the Croatian sportsbook SuperSport was acquired for €690m. Those are big numbers for brands operating in what are small markets.
The €750m deal Entain agreed to buy STS, the sports betting leader in Poland, seems to have tipped investors and shareholders over the edge as they went public with their dissatisfaction. This is despite Poland being a considerably larger market than either Holland or Croatia and, on the face of it at least, the acquisition gives Entain a prime spot in a major European market.
This led shareholder Ricky Sandler, CEO of New York-based hedge fund Eminence Capital, to spell out his grievances in an open letter to Entain; the details of which made for a tough read. Explaining how Entain raised the €600m it needed to do the deal via a share issue, Sandler said the approach was “perplexing on many levels” because funding M&A with undervalued equity was destroying “shareholder value”.
He added that the Entain Board had “previously rejected multiple takeover approaches at materially higher prices”, such as those by MGM (and DraftKings) in 2021, “on the grounds that those offers undervalued the company, but (to) then turn around and issue equity at depressed prices for an asset that is at best a ‘nice to have’ is illogical”.
Sliding doors
His most stinging words focused on the group’s assessment of the STS deal as being “accretive” to its earnings per share.
“It demonstrates that management either doesn’t understand finance or, worse, that they believe shareholders are naive. Issuing Entain stock at ~7x EBITDA (excluding the value of the BetMGM JV) to buy an asset at ~12x EBITDA is value destructive to shareholders, even with incredible synergies,” he said. The STS deal has also left Entain unable to access capital for further big ticket deals, such as the recent sale of SKS365 in Italy.
MGM offered $8bn for Entain in 2021 and the UK group finished the year on a market cap high of $16.5bn. After nearly three years of wheeling and dealing, Entain is currently valued at $6.3bn. Currently MGM is happy to watch and wait, but for Entain it really is a case of what might have been.
