MGM’s refusal to up its bid for Entain means no deal between the two groups. But as the U.S. market continues to grow, time will be the biggest healer, says Scott Longley.
If ever an unconsummated deal had a look of unfinished business, it is surely MGM’s nixed buyout of Entain.
There were few expressions of surprise when the news filtered through on Tuesday that MGM had decided against going back with an improved offer for Entain.
The original bid for its joint-venture partner in BetMGM became public earlier this month when it was disclosed that talks had been going on since November.
That bid was rejected on the basis that it “significantly” undervalued Entain. Doubts were then immediately cast on the possibility of a deal when major MGM shareholder Barry Diller told the Financial Times he was “skeptical” of the deal going through.
Playing the game
However, even after such comments, the logic of MGM buying Entain still shone through.
As it stands, MGM only gets half of the economic benefit from the US sports betting and online gaming opportunity.
In comparison, rivals Caesars, now that it has bought William Hill, Penn National with Barstool Sportsbook, Wynn with WynnBET and Bally’s all control their own betting and gaming destinies.
MGM does not and there is every reason to suspect that sticks in the craw. Half of something that will be very big is good. Owning the whole enchilada, however, has much more appeal.
I’ll be back
It is why the analysts were quick to suggest that MGM won’t leave this one alone for too long. In a note pointedly titled ‘MGM not bidding – for now’, analysts at Peel Hunt said that time would be the healer.
“Given the increased significance of the MGM-Entain U.S. joint venture, we believe it is likely that the two companies will merge one day.”
In the meantime, the analysts noted, Entain has “plenty of growth to go for as an independent operator.”
Indeed, Entain’s trading statement that accompanied the news that the deal wouldn’t be proceeding was very positive.
Online gross gaming revenue for 2020 was ahead by a whopping 28% and an even more eye-catching 41% in the fourth quarter. Sports betting revenue was up 58% in the same period.
Of course, retail suffered. In the UK the business saw a 36% decline in GGR and in the European segment that fall was 39%.
Build back better
But it is the U.S. business performance that pretty much guarantees further interest in Entain as a buyout possibility.
Now live in 11 states, Entain pointed out that BetMGM has an 18% share of market in the fourth quarter. In the states launched in 2021, it has a 21% market share.
In other words, it has the momentum and as Peel Hunt suggest, it is not in the interests of either partner to disturb the relationship.
MGM isn’t the only potential buyer for Entain. Its 50% share of the U.S. joint venture is not a poison pill.
But it remains the most logical buyer and in this sense the decision to pass this week doesn’t make a whole deal of sense. When MGM goes back with another offer, there is every possibility it will have to pay more for the upside potential rather than less.
One thing is clear. BetMGM is a top brand according to the Wedge Index of gaming-friendliness and is expected to remain so going forward. The weighting given to BetMGM places it at the top table and adds four points to every state it enters.
