As sports betting stakeholders converge upon Las Vegas next week for one of the nation’s largest gambling conferences (G2E), the industry is still buzzing about a proposal that could transform digital sports wagering for the next decade.
The first nine months of 2021 have been rife with M&A activity, headlined by Caesars Entertainment’s $3.7 billion acquisition and subsequent rebrand of William Hill U.S in May. Over the summer, DraftKings entered into a definitive agreement to acquire Golden Nugget Online Gaming, while Penn National Gaming inked an agreement to acquire theScore in a move that will enable Barstool Sportsbook to gain market access in Canada. Then, on the B2B side, Hollywood superagent and Endeavor CEO Ari Emanuel turned heads this week when the company entered into an agreement to purchase Scientific Games’ sports betting division, OpenBet, for $1.2 billion.
But a $22 billion cash-and-stock proposal from DraftKings to acquire Entain plc last week easily dwarfs them all. The $22 billion price tag not only doubles an $11 billion offer from MGM Resorts to acquire U.K.-based Entain in January, it is more than the entire U.S. legal sports betting handle last year, when bettors wagered $21.5 billion nationwide. If DraftKings is able to orchestrate the intrepid power play, it will simultaneously expand the company’s footprint beyond U.S. borders while weakening one of its main rivals in BetMGM.
The proposal was submitted against a backdrop of continued expansion in the U.S. legal sports betting market with Connecticut set to go live Thursday.
“Although we have remained adamant in our expectation for sector M&A to continue, I can’t say we saw this one coming,” wrote Will Hershey, co-founder and CEO of Roundhill Investments, in a company newsletter. “Not only is the deal size massive (if consummated it would be the largest deal ever in online gambling), but it’s also complicated in terms of potential implications.”
The importance of owning your own tech stack
While M&A deals in the sports betting space are typically fraught with complexity, there are numerous reasons why the acquisition of Entain could create ripple effects throughout the industry, as Hershey notes. BetMGM, a 50/50 joint venture formed between MGM Resorts and Entain (formerly GVC Holdings) in July 2018, would certainly be the centerpiece of the potential deal.
When BetMGM held its annual investor day presentation in April, the company targeted U.S. sports betting and iGaming market share north of 20% on a long-term basis. Two months earlier, BetMGM reported market share of of 22% in all U.S. jurisdictions where the company maintained an active presence. The estimates comport with those of Macquarie analyst Chad Benyon, who projects a 20% long-term market share for BetMGM, DraftKings, and FanDuel, the three unquestioned leaders in the U.S. sports betting market.
A critical, if not the most important, piece of the joint venture is BetMGM’s end-to-end technology platform, which is powered by Entain. Each day, approximately 2 million bets are placed on the Entain platform, BetMGM noted in the April presentation. In total, the platform has a customer database of over 160 million profiles, which Entain uses to inform its personalization algorithms, the company said. During any given Saturday, the platform handles seven times more interactions than Amazon on Black Friday, Entain contends.
From a cross-selling perspective, the platform enables full customization and operation of multiple brands without requiring significant development or cost, BetMGM COO Ryan Spoon said in April’s presentation. For instance, the omni-channel offering enables customers to wager on sports through the BetMGM app in New Jersey while also playing Party Poker, an online card room that was purchased by Entain in 2016.
In short, MGM Resorts can ill afford to lose BetMGM to DraftKings or any other top competitor. In response to DraftKings’ proposal, MGM Resorts said that maintaining “control of the joint venture” represents an important step toward achieving its “strategic objectives.” MGM Resorts also believes that any transaction which results in Entain or its affiliates owning “a competitive business in the U.S.,” i.e. BetMGM, requires the consent of the parent company.
MGM Resorts is considering options to gain full control of the joint venture, including a possible IPO of BetMGM and a board reshuffle, Bloomberg reported.
MGM Resorts International is said to be weighing ways to get control of the BetMGM online gambling business now that its partner in the venture, Entain, has received a takeover bid https://t.co/k7sN7xjocb μέσω @technology
— Yanuhm (@giwta_ktk) September 28, 2021
A complex tri-deal
One potential resolution involves a three-way transaction where MGM Resorts could look to purchase the remaining 50% stake in the BetMGM joint venture, Bank of America gaming analyst Shaun Kelley wrote in a Sept. 22 research note. Assigning a proper valuation to BetMGM is tricky, Kelley emphasized, given MGM Resorts’ exclusivity provision with Entain for U.S. online sports betting. Bank of America values BetMGM as a standalone asset in the range of $3-6 billion.
By exiting the joint venture, Entain invites the possibility that DraftKings could acquire the European gaming giant’s non-U.S. assets in an effort to expand outside of North America. According to Bank of America research, Entain’s European online business would account for the majority of the 2022 revenue mix for a pro forma DraftKings-Entain company if the acquisition is consummated. Entain, one of Europe’s largest online gambling conglomerates, is the parent company of popular sports betting brands such as Ladbrokes, Coral, bwin, and Sportingbet.
Under this scenario, Entain’s European business would account for 58% of the revenue mix, with DraftKings’ U.S. online business representing about 23%, Kelley notes. In August, Entain reiterated 2021 full-year adjusted EBITDA guidance of £850-900 million, or $1.1-1.2 billion, based on Thursday’s exchange rates. As a result, DraftKings could accelerate its long-term goal of reaching profitability.
One thing to note, especially assuming any acquisition is primarily stock, any deal would be accretive to $DKNG.
DraftKings consensus EBITDA of (-$590) million this year, versus +1.2B for Entain. Buying Entain essentially makes the pro-forma company profitable.
— Will Hershey (@maybebullish) September 21, 2021
A power play from DraftKings could also result in MGM paying more for full control of the joint venture than if Entain accepted MGM’s January offer. Beynon, the Macquarie analyst, also believes the scenario is a prudent strategy for all three companies.
“In our view, the most likely outcome is for DraftKings to acquire the non-U.S. business and arrange a sale/tech agreement with MGM (Resorts),” Beynon wrote in a Sept. 23 research note.
— The Merger Arbitrageur (@MergeArbLimited) September 27, 2021
For DraftKings, one downside is that, by expanding globally, the company would lose its distinction as the only pure-play, vertically integrated U.S. online sports betting operator on the market. DraftKings has ridden the narrative to a massive valuation based on its current revenue stream, according to Chris Grove, a partner at Eilers & Krejcik Gaming. DraftKings increased its 2021 full-year revenue guidance to a range of $1.21-1.29 billion in August after reporting second-quarter revenue of $298 million.
Another analyst, Truist Securities’ Barry Jonas, believes that much of DraftKings’ premium valuation today is based on its U.S. pure-play/higher-growth status.
Recent stock activity
DraftKings must announce whether it intends to make an offer for Entain by Oct. 19, according to UK takeovers and mergers law.
DraftKings, which launched a retail sportsbook at Foxwoods in Connecticut on Thursday, traded around $48 in the afternoon session, down 17% from its high on Sept. 21. Two institutional investors, Wellington Management Group and Credit Suisse, have been bullish on DraftKings, while purchasing 30,396 shares and 135,770 shares, respectively, on Sept. 27. A third firm, Blackrock Inc., unloaded a position in DraftKings on the same date, selling a stake worth approximately $2.6 million. The recent activity serves as a gauge of how large financial institutions are adjusting their position in DraftKings based on the M&A speculation.
On the London Stock Exchange, Entain closed Thursday at 2,130 pence, down 1.6%. Last week, Entain shares spiked more than 20% on news of the proposal, before reaching a 52-week high of 2,500 pence on Sept. 22. DraftKings’ revised proposal of 2,800 pence for Entain represents a 31% premium to Entain’s Thursday closing price.