GMVHY - Entain: MGM Resorts Should Acquire It Before BetMGM Impresses Public Markets

2023-04-18 07:30:00 ET

Summary

• BetMGM is not profitable yet. In fact, it is still growing its losses, but that can eventually turn and Entain plans on turning the ship around towards the end of 2023.
• There has been some speculation in the past of MGM Resorts buying Entain to consolidate an online gaming competence into its company as well as reclaiming BetMGM fully.
• Apparently, an initial barrier was a UK government review of gambling, but after they publish their whitepaper, it is possible MGM could renew its interest.
• Entain's share price has languished despite profit growths due to macro concerns hitting markets, but MGM should be well capitalized to be able to move in an adverse environment as well.
• Despite a languished price, Entain still has a high multiple. There are things that are just so much cheaper on markets nowadays, despite some possible speculative catalysts.

Published on the Value Lab 04/14/23

Entain ( OTCPK:GMVHF ) continues to deliver strong topline results despite headwinds from Netherlands. BetMGM is still an income drag for now, but management is aiming for profitability from this segment towards the end of the year, with 2024 likely to show a full consolidated year of growing BetMGM profits. Still EBITDA is growing as of the FY 2022. BetMGM's growth is secular and robust, and when it becomes a profit contributor Entain's profile changes entirely. Considering the Entain markets and the probability of great income growth from BetMGM, it would make sense for MGM Resorts ( MGM ), which owns the other half of BetMGM, to look into folding in Entain. With pending decisions on the UK gambling environment from regulators, certain conditions for terming a deal may come somewhat soon providing a speculative catalyst.

Quick FY Notes

The topline growth was pretty good. Net gaming revenue or NGR was up 10% excluding BetMGM growth. Including BetMGM growth the NGR growth was 15%. All of this includes pressures from Netherlands which affected online NGRs quite meaningfully, but as we predicted would not be enough to offset the mounting growth being achieved by Entain. Online NGR was down 2% including the Netherlands impact, and up 3% excluding it. German markets also had some pressures on how games can be designed that limit turnover. In Netherlands the issue was a cool-off period by regulators after they had instituted a new framework for online gambling, publishing operators that were working in Netherlands while it was a grey market. EBITDA was up 13% for the full year.

BetMGM continues to be owned by Entain through a J.V. split 50:50 with MGM. We thought losses might start to narrow in this business at this point, but a marketing push that has resulted in highly needle-moving NGR results has apparently cost their bottom line, with further increases in absolute losses. Management has been more specific in the latest call and confirmed that they believe in the second half of 2023 losses should narrow.

Over in the U.S., BetMGM continues to go from strength to strength. We are firmly established as a top 3 operator with access to around 48% of U.S. adult population. 2022 revenues were ahead of expectations, and our progress remains on track to deliver positive EBITDA in the U.S. in the second half of this year.

Jette Nygaard-Andersen , CEO of Entain

Looking Forward

About half of Entain's revenue comes from the UK, whose government has recently been vocal about having to make some changes to regulation around gambling to protect consumers. Some speculators have believed that previous rumors of MGM trying to take over Entain, in part to reclaim the other half of the BetMGM ownership, was quashed by these legal developments. Governments in Western Europe have not at all been averse to aggressively changing gambling regulations that affect games and directly affect revenues for companies like Entain. The whitepaper covering the issues perceived by government should be published shortly, and this may introduce some certainty to allow MGM to start reconsidering a deal, assuming they considered the acquisition in the first place. For investors, this is a possible catalyst, even in a pretty slow M&A and acquisition environment, in part due to the solid performance of MGM which should benefit from continued capital availability to finance a transaction like that, but also because time is of the essence. With more quarters, Entain may demonstrate to public markets how profitable BetMGM can be, which is forecast to have 30% EBITDA margins at final levels. This could affect the price MGM would pay for Entain which has managed to keep pretty languished prices for a while. Management may see it as a win-win to not wait out for a higher price and get investors paid with an immediate control premium in a pretty depressed market.

From a valuation perspective, the company remains valued at around 10x EV/EBITDA, with EBITDA likely to grow at least 50% over the next couple of years as Entain's portion of BetMGM matures into profitability. The effective forward multiple is around 6-7x, which is quite cheap for a gambling company and its inelastic markets. However, there are always going to be regulatory risks for a company like Entain, and while secular growth in the US driven by BetMGM can be relied upon for a while longer, more mature western markets are less solid, and weaker macro is a little bit of a problem even for Entain. While the economics for Entain are decent, we continue to believe there are better opportunities elsewhere on markets. It's a pass from us.

For further details see: