Analysts Say Much at Stake in Possible DraftKings-Entain Deal

While two analysts think DraftKings is ultimately after non-US assets, another warns ‘best case’ scenario for MGM is a hobbled BetMGM.
Analysts Say Much at Stake in Possible DraftKings-Entain Deal
October 01, 2021

Nearly two weeks after DraftKings made an offer to purchase UK-based gaming conglomerate Entain in a cash-and-stock deal valued at $22.5 billion, analysts appear to be in agreement on several points.

BetMGM, a joint venture between Entain and MGM Resorts International, is a huge asset that MGM wants to control. And MGM, which made an unsuccessful $11 billion bid for Entain in January, thinks it has a say in any potential deal between DraftKings and Entain.

But beyond that, analysts have mixed feelings about what will happen next, or whether such a transformative deal will even happen.

DraftKings may have out-maneuvered MGM

Susquehanna Financial Group analyst Joseph Stauff called DraftKings’ bid for Entain an “aggressive” move, but it was also a move that managed to outfox MGM over what happens with BetMGM.

Worse, under all of the “likely” scenarios moving forward, Stauff said any deal between DraftKings and Entain would hobble BetMGM to some extent.

“We conclude that DraftKings has all the leverage, considering that even if its efforts to own Entain’s 50% interest in BetMGM were to be blocked—either by regulators or assuming MGM’s consent is ironclad—then it’s still DraftKings that can dictate the terms on what BetMGM needs to continue its operations, namely Entain’s tech stack, ad-tech, and product development,” Stauff wrote in a research note Friday.

Either scenario “would lead to a permanent margin hit for BetMGM, assuming DraftKings’ control of Entain leads to an expensive shared services agreement for BetMGM to continue to use Entain’s tech,” he added.

Strong interest in Entain’s non-US assets…

Two analysts believe DraftKings is more interested in acquiring Entain’s non-US assets because it would fuel the company’s growth, albeit at a slower pace than what it’s become accustomed as an up-and-coming US pure-player.

Entain’s portfolio includes brands it has acquired over the years but aren’t well known in the US, including Cheeky Bing, Crystalbet, Coral, Foxy, Gala Casino, Ladbrokes and Neds, according to a September 23 research note by Macquarie analyst Chad Beynon. But Entain also owns PartyCasino and partypoker, two brands that are active in the US.

“We still believe that DraftKings wants global revenue/EBITDA (earnings before interest, taxes, depreciation and amortization) at a financially accretive price,” Beynon said. “In our view, the most likely outcome is for DraftKings to acquire the non-US business and arrange a sale/tech agreement with MGM.”

In a separate note on September 21, Truist Securities analyst Barry Jonas said DraftKings, if successful in acquiring Entain’s non-US assets, “would benefit from acquiring material revenue/EBITDA at a significant valuation discount to its multiple…and accelerating a move to profitability, helping fund growth with international cash flow.” Any proceeds from a sale of BetMGM would be an added bonus, he said.

But Jonas added that it was unclear how the market would value a new company created from a DraftKings-Entain deal, considering the majority of revenue from the combined company would come from “relatively lower-growth international markets. We believe much of DraftKings’ premium valuation today is based on its US pure-play/higher-growth status.”

Beynon conceded that selling Entain’s 50% stake in BetMGM would clearly strengthen MGM, one of DraftKings’ biggest US competitors. But despite that, he said Macquarie believes “DraftKings is inherently confident in its strategy/tech and that it would prefer to acquire Entain at what we believe is a highly accretive price.”

Beynon estimates that MGM would ultimately pay between $6.4 billion and $11.1 billion for the remaining 50% stake in BetMGM. He also estimates that should BetMGM be sold to MGM, the pro forma purchase price for DraftKings to acquire Entain would be between $11.4 billion and $16.2 billion.

…and in possibly hampering BetMGM

Stauff took issue with an “evolving consensus” among other analysts that “incorrectly assumes DraftKings ‘comes in peace’ focused only on Entain’s international platform while accommodating one of its major US competitors.”

Stauff said he has spoken with “multiple investors [who have] a seemingly bullish MGM perspective that DraftKings is likely to provide these highly required capabilities to BetMGM at a ‘market rate,’ and some have even argued that DraftKings would also be forced to sell the 50% interest in BetMGM back to MGM at a reasonable price, assuming there are no competing bids for the 50% stake,” Stauff wrote.

He called such speculation “highly unreasonable.”

“If you are DraftKings, why would you allow one of your biggest competitors in the US an ‘at-market’ arrangement and an ideal ownership structure?” Stauff asked. “Doing so would put DraftKings at a competitive disadvantage [and] frees up BetMGM from a convoluted ownership structure.”

He added that even in the best case scenario for MGM, where DraftKings is unable to get control of Entain’s 50% stake in BetMGM, DraftKings “can still notably marginalize its major competitor.”

In an exclusive interview Friday, Stauff told Michigan Gaming Review that “the premise that DraftKings made a bid for Entain because they wanted the tech stack, I think is total nonsense. They did an internal software migration that was only completed in July.

“It seems very unlikely DraftKings is going to spend $23 billion two months later to get another tech stack. I realize that some people are talking about that, but that makes no sense to me.”

Asked if MGM has a say in whether a DraftKings-Entain deal goes through, Stauff said MGM “alluded to it, but it’s not particularly known because it’s not publicly disclosed anywhere.

“People are just speculating simply based on six words that were released in a very small press release on the same day.”

Meanwhile, MGM doesn’t seem to want Entain

Stauff said MGM’s decision not to be more aggressive in its attempt to acquire Entain back in January has come back to haunt the company. He estimates that any fresh bid by MGM to purchase Entain in order to gain outright control of BetMGM could ultimately cost about $25 billion, something that MGM “seemed to telegraph to the market that it did not want to do, but it still might have to.”

If MGM did make such an offer, it would lead to “notable downside in the near-term,” Stauff said.

Jonas agreed that it doesn’t appear MGM is interested in a second bite at the apple.

On September 27, the day MGM announced it would acquire The Cosmopolitan of Las Vegas for $1.6 billion, Jonas remarked in a separate research note that “MGM spending about 15% of its dry powder here may suggest they’re less willing to make a run at all of Entain, versus our favored approach of just acquiring all of BetMGM.”

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