As BetMGM guides toward profitability in the second half of 2023, U.K.-based conglomerate Entain is mulling its next steps with its massive, long-term investment in one of the three leading sportsbooks in the U.S.
BetMGM, a 50/50 joint venture between MGM Resorts and Entain plc, is coming off a successful year in which it posted net revenue of $1.4 billion while cementing its status as a top-three online sports betting and iGaming operator. By this time next year, when Las Vegas hosts the Super Bowl for the first time ever, BetMGM expects to soar to new heights.
Over a six-month period through Dec. 31, 2023, BetMGM anticipates turning a profit for the first time in the five-year history of the venture. Since its inception in 2018, the two gaming powers have invested approximately $1.25 billion in BetMGM, enabling the operator to strike partnerships with the top leagues in North America and compete with industry behemoths FanDuel and DraftKings. But if BetMGM is profitable over the latter half of this year, Entain will discontinue financial support of the online gaming operator, CEO Jette Nygaard-Andersen said Wednesday during a company earnings call.
Representatives from Entain declined comment when reached by Sports Handle on Thursday.
Already live in 25 jurisdictions with access to approximately 45% of the adult population in the U.S., BetMGM entered two new markets last month in Ohio and Massachusetts. Still, the relationship between MGM Resorts and Entain appears to be at a crossroads with the future of BetMGM hanging in the balance. The two companies are faced with difficult decisions in the coming months that may produce some tense moments in boardrooms on both sides of the Atlantic.
Sifting through the weeds
Entain’s comments came less than a week after BetMGM provided full-year 2023 revenue guidance of $1.8 billion to $2 billion, bracketing Bank of America’s estimates of $1.92 billion. BetMGM ended 2022 with a fourth-quarter online sports net revenue margin that doubled from the final three months of 2021. Matt Britzman, an equity analyst from Hargreaves Lansdown, a U.K.-based financial services company, described BetMGM on Wednesday as “a shining star” after the venture topped recent performance expectations.
“The real question here is how long this will remain a joint venture, it seems unlikely both parties will want to continue their U.S. gambling exposure in its current form indefinitely,” Britzman wrote in a research note. “If we had to put money on it, a bid from MGM to take full control looks the most likely outcome — time will tell.”
While there is temptation to speculate on a merger, one analyst of financial issues in the gaming industry cautioned against reading “too much into” Entain’s announcement. The announcement does not mean that Entain is exiting the joint venture, per se. Simply put, once the venture becomes profitable, it will be able to “live its on own,” he said, without requiring “investments from the mothership.”
When asked to explain Entain’s strategy, a source close to BetMGM remarked that since the venture expects to generate positive cash flow internally, the funding requirement from shareholders will cease.
The @BetMGM Lion is a leader in the pride!🦁#TheKingofSportsbooks has entered 2023 with a world class performance for FY22. Last year, the team brought the thrill, excitement and #entertainment to more fans than ever before. https://t.co/G5MVaAelNM#ItsYourGame
— Entain (@EntainGroup) January 26, 2023
Entain, formerly GVC Holdings, is one of the world’s top gambling companies. Fueled by a record fourth quarter in active customers, Entain now expects 2022 full-year EBITDA of £985 million-£995 million ($1.18 billion-$1.2 billion), ahead of previous guidance. Entain developed BetMGM’s end-to-end technology platform that handles more than 2 million wagers per day. On busy sports days, the platform handles about seven times the interactions that Amazon does on a typical Black Friday, according to Entain.
As a result, Entain may command a high asking price if MGM Resorts looks to take full control of BetMGM.
“It’s unlikely Entain will retain its ownership stake in BetMGM much longer,” said Lloyd Danzig, founder and CEO of Sharp Alpha Advisors. “Whether MGM makes a bid for the entirety of Entain or just its share in the joint venture, full ownership will allow for product development capabilities and agility that are currently constrained by the existing relationship.”
The scenario is just one of many that the companies can pursue moving forward. Here are several others:
- Both companies retain ownership in the 50/50 joint venture.
- Entain exits the joint venture and leaves the U.S. market (after MGM Resorts buys Entain’s 50% stake).
MGM Resorts gains full control of BetMGM, then eventually spins off the unit as a separate public company.
- MGM Resorts makes a bid to acquire Entain, the bid is accepted, and the deal is completed before next year’s Super Bowl.
Complicating matters, global operators remain jittery while waiting on the release of a comprehensive white paper by a U.K. government committee. Last week, U.K. Gambling Minister Paul Scully noted that the committee is putting the “finishing touches” on the much-awaited paper that is expected to set new guidelines to update standards in the U.K. Gambling Act. The paper, which has been delayed by months due to political turmoil in the U.K., may not be released until March, according to a U.K. gambling source.
MGM Resorts made a splash last year when it completed an acquisition of Swedish online sports betting operator LeoVegas for $604 million.
“The outcome here might depend on the upcoming white paper which is expected to specifically address rules for U.K. operators with overseas operations. That said, I think a full takeover attempt is most likely, as MGM has expressed interest in EU/global online gaming via its LeoVegas acquisition,” said Will Hershey, co-founder & CEO of Roundhill Investments.
Once the paper is released, MGM Resorts may revive attempts to acquire Entain, the Daily Mail reported on Jan. 21, citing London sources. Another publication, banking news site CTFN, described the transaction as “inevitable,” as several sources suggest that MGM Resorts is “constantly weighing up a bid” for Entain. One analyst from Deutsche Bank wrote in a research note last month that a merger between the two would be a “fairly obvious combination,” while adding that a new bid with additional cash would probably be “supported by shareholders.”
UK gambling minister: White paper out within weeks but don’t call them “affordability” checks 🇬🇧🔍
— iGaming NEXT (@iGamingNEXT) January 27, 2023
There is some sentiment that draconian measures by the U.K. Gambling Commission could have a negative impact on Entain’s valuation. Strict measures on affordability checks and marketing restrictions, as well as lower limits, may cause investors to shudder. Entain CFO Rob Wood indicated on Wednesday’s call that while Entain has already “absorbed the lion’s share” of enhanced affordability measures that may be introduced, there could be an “ongoing impact” in the first half of this year.
Truist Securities analyst Barry Jonas believes that MGM Resorts management should wait for a resolution from the commission before extending any potential bid.
Entain traded at £1,585p on Friday, resulting in a market capitalization of £9.31 billion. Entain shares have jumped about 6.5% since Wednesday’s earnings release.
Path to profitability
As the Super Bowl approaches in just over a week, it is no secret that 2023 is a pivotal year for major sportsbooks. Not only does 2023 represent the fifth anniversary of the historic PASPA decision, it is a year in which leading operators need to prove to investors that sportsbooks will emerge out of the red.
After Caesars Entertainment pivoted last year on an ambitious plan to invest $1 billion in its online gaming division, some rivals followed by sharply curtailing marketing spending. When it comes to reaching profitability for the first time, many companies are feeling the pressure to deliver returns this year, a high-level industry source told Sports Handle this week.
MGM Resorts last made an attempt to acquire Entain in January 2021 with an $11 billion (£8.1 billion) bid for a company that owns popular European gaming brands such as bwin, Ladbrokes, and Coral. At the time, Entain dismissed the bid out of hand, claiming that the proposal “significantly undervalued” the company and its prospects.
That September, DraftKings raised the stakes for Entain with a $22 billion cash-and-stock proposal in which the Boston-headquartered company sought to expand overseas. After discussions between the Entain board and DraftKings on a possible transaction, the latter decided in late October 2021 not to make a formal offer.
Since then, the investment landscape has changed dramatically. In a 2022 in which the S&P 500 fell nearly 20% on global economic uncertainty, sports betting stocks were clobbered as profitability concerns lingered. There were some bright spots, though, in a sea of gloom. Last September, FanDuel made history when it became the first U.S. sportsbook to report a profit in a single quarter. Then, weeks later, FanDuel received an implied valuation of $20 billion when a New York arbitration court ruled on a lengthy dispute between Flutter and Fox Corp.
Speculation Grows MGM Will Make Another Bid for Entain
#Entain #mgmresorts #BetMGM https://t.co/F7YpSSwl8g
— igaming post (@igamingpost) January 23, 2023
While BetMGM is well ahead of DraftKings in terms of its path toward profitability, according to Roundhill’s Hershey, it trails DraftKings in market share. BetMGM ended 2022 with an overall U.S. market share of 13%, which rose to 20% in states where the venture made its debut on the first day of live wagering in the jurisdiction.
“As a standalone, I would imagine BetMGM would trade toward the higher end of the $3 billion to $6 billion range,” Hershey told Sports Handle.
At last week’s business update, BetMGM credited an improved approach to player bonusing from its data science team for increased margins, as the operator continues to optimize its bonus environment. Though expenses may balloon in the first several months after a state launch, eventually real-money players will emerge and the samplers “will churn out,” BetMGM Chief Financial Officer Gary Deutsch indicated on an analyst call.
At the same time, BetMGM is continually refining its analytics framework for how to respond to bettor activity, BetMGM CEO Adam Greenblatt told Sports Handle this week. Bettors are scored on their likelihood of becoming profitable players, as well as their expected value to the business at any point of the customer cycle. A certain player may maintain an edge over the book in basketball, but could have less of an edge in other sports, Greenblatt explained.
The models then inform BetMGM on how to structure bonuses for certain players.
“These models of expected value really drive how we invest in players,” Greenblatt told Sports Handle at the opening of a BetMGM sportsbook inside MGM Springfield in Massachusetts.
BetMGM, the joint venture between Entain and MGM Resorts International, is “confident” of achieving up to $2.00bn in net revenue in 2023 after exceeding financial targets during its 2022 financial year https://t.co/lesyk6DVZK pic.twitter.com/7caZYiJFnc
— iGB North America (@iGBNorthAmerica) January 26, 2023
By eliminating bonus shoppers and placing a sharper focus on long-term bettors, BetMGM can lower cost-per-acquisition metrics. For the second half of 2023, BetMGM anticipates that it will attain profitability as markets in several key states continue to mature.
“Moving to profitability is a result of the evolution of our business,” Greenblatt added. “You are left with a base of players who have become part of your core contribution, who cost you less to maintain than the early cohorts of players.”
MGM Resorts traded around $42 a share on Friday, up approximately 25% since the Ohio launch on New Year’s Day. After falling below $27 last June, MGM is approaching its 52-week high of $49.
Investors may learn more about MGM Resorts’ near-term commercial relationship with Entain from the company’s 2022 year-end earnings call next Wednesday. MGM Resorts declined comment Thursday on any merger speculation.