If Entain Is In Play, Watch For MGM Taking Another Pass At Its 50% BetMGM Partner

seekingalpha04-11

Speculation rises that BetMGM's sports betting partner Entain Plc could be acquired by Apollo Global.MGM may make another offer for its 50% BetMGM partner, taking advantage of Entain's regulatory ...

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(APO) signaling interest.  MGM's twice-rejected offer for its 50% BetMGM partner may be awakened once more as the most logical acquirer. Transactions are long part of MGM parent DNA, with ongoing projects and more to come.  State of play: Since 2021, Entain Plc, MGM's 50% partner in BetMGM has received two out offers from the MGM parent-both rejected. Also in 2011, Entain got a shot out of the cannon bid of $22b from Draft Kings. It was also rejected. Since then, the UK operator has encountered regulatory headwinds, both emanating from regulators about certain policies and the UK White Paper that has slapped limitations on sports betting marketing and betting limits. Google Above: MGM stock at writing $46. Recent headwinds caused underperformance in the UK and global business. But its BetMGM share has skyrocketed in accretive value built off the U.S. market's dramatic growth. At writing, BetMGM holds a 24% share of the U.S. market, third after the dominant leaders FanDuel (FLUT) and DraftKings (DKNG). Bet MGM/s 2023 performance brought its NGR for the year to $1. 96b up 36% y/y. The departure of the Entain CEO, plus uncertainties about the damage from regulatory miscues and slowing growth in its global business, have once again raised the interest among hedges about a takeover. This has raised speculation by my industry colleagues that could be revving up to MGM taking another pass at the company with a revised offer. Analysts' forward view puts an MGM price target, or PT, at $53 by early 2025. Our PT still sits at $55, and we think it's reachable by 3Q24. Our faster ramp is built off our estimate that a Macau recovery will be much faster, reaching a pre-covid 2019 pace by late Q324. It also reflects our strong conviction that the BetMGM unit will outperform and sustain its market share at #3 in the U.S. At writing, Entain's U.S. unit is trading at $10.44 a share. Its market cap is estimated at $6.68b. This valuation plus a reasonable premium could put the company's partial value back into the MGM crosshairs. Under most circumstances, it would appear that another MGM bid has lots of run room to satisfy holders. We would assume a deal could be made in cash plus MGM shares, currently trading at $46. Despite overall bullish results for parent MGM during Q4 2024 and analyst consensus that prices it as a BUY for value, the stock has lagged. It has a forward P/E of 16.76, decidedly positive vs most sector peers. Much of the ongoing sentiment springs from Q1 2024 analyst earnings calls for $0.56. MGM's DNA is all about transactions for growth google Above: MGM's geography. Some of these properties already are sold or leased. It's a transaction-oriented strategy. We raise the prospect of another run by MGM at Entain's 50% of BetMGM as what to us is a clear perfect storm shot to help Entain's UK regulatory woes, management changes, and slowing growth from its global markets. BetMGM right now is among the fewest bright spots on the Entain performance. But neither is it a panacea to solve the UK firm's core problems. A $11b cash MGM offer windfall originally rejected back in 2021 could be considerably upped given the growth of BetMGM since. Even if we assume a 20% premium, it would fall easily into MGM's ability to finance such a deal. The key here is this: Would Entain fare better taking the mountain of cash now, or continuing to fight it out against multiple challenges at home? We think it's a potential gift to Entain. The benefits to MGM will be many above harvesting 100% of the forward BetMGM profits. It is to be recalled that the central rationale MGM had for partnering with Entain to begin with was use of its tech operations, research and know how. With its recent $265m buyout of the Angstrom tech unit, BetMGM no longer needs to depend on its current partner to add tech operation skills and research to its U.S. marketing sets. So, we see a theoretical win, win for MGM and Entain if such a deal could be consummated. A hedge fund or private equity deal by any current noisemakers we have heard from will inevitably result in a resale at a profit to a sports betting operator by DKNG. No middle man makes sense here. Above all is the potential rejection of a sale to a third-party entity, no matter if it is to a fund or even more problematical to another sports betting platform. MGM rejected DKNG's proposal back in '21 on many grounds of potential conflict that easily would find itself winding through the courts for years. The DKNG was wildly excessive, reflecting a lot of bloviation by management as its valuations raced above $70. Caesars (CZR) has set the right strategy for MGM with their William Hill deal. They wanted the seminal sports book U.S. business, which they bought for $2.9b in 2011. They then immediately sold the Hill international business to 888 Holdings for 2.2b GBP. For MGM, it would be a layup. Then, given an improved outlook for Etain, they could bolster both its global business and possibly enter some kind of MGM approved purchase of one of the third-tier U.S. operators that BetMGM already competes with now. MGM's history is rife with partnerships, mergers and acquisition deals as a key tool they use to enter or expand their market footprints. No other peer in gaming comes close: 2014: MGM announce 50% partnership with Japan's Orix Corp to develop a major integrated resort in Osaka. They have held fast to their plan, while nearly all major operators have abandoned the pursuit due to messy politics and polling. They will debut first in the Japanese gaming market by 2032. 2019: MGM buys Empire City (Yonkers) raceway in suburban NY for $860m. They will expand if they win a state bid ahead. 2021 MGM announces its pursuit of an \"asset light\" strategy that results in monetizing its realty with sales to REITs. It is based on meeting holder complaints on returning value. 2016: Boyd Gaming (BYD) sells its 50% stake in the top-grossing AC property The Borgata for $9009m to MGM. Despite sharp declines in the AC market, its leadership conserves value. 2023: MGM buys Scandinavian-based sports betting operator LeoVegas and tech business for $607m, giving it access to the digital footprint of Push Gaming. There is a strategic pattern in the above. It is twofold; One, global presence, and two, building a footprint in digital space. We think the possible new run by MGM at its partner's 50% fits this DNA history. Management is clearly watching the current rumblings from the sidelines, awaiting further movement. Management has announced its U.S. sports betting goal of a 20% share of market, which anticipates it holding in 3rd place, right behind the two market leaders. If we accept the 2030 projection of a U.S. sports betting market of $30b band BetMGM does reach 20% sum, it translates to $6b in NGR in a shrunken market of possibly 6 operators with marketing costs well under control. The numbers work very well for another MGM run at Entain's shares. The only question remains is this: Given the recent flurry of talk about an Entain sale to a financial operator, why would MGM continue to sit on the sidelines? My guess, they won't. Result: a catalyst for MGM shares to move more quickly above $46 here.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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