MGM and Entain’s M&A pissing match

M&A is always a competitive game but MGM and Entain look set to take it to another level +More

Earnings+More

May 09, 2023

Good morning. In this month’s edition of Deal Talk:

MGM Resorts and Entain appear locked in a proxy battle of competing M&A as each builds up their respective positions in the online space. It is a match up that could yet decide the future of their joint venture.
The European market continues to heat up, with FDJ being tipped to make its presence felt.
Inside the deal reviews FansUnite’s recent sale of McBookie as it looks to concentrate on the affiliate space.

I'd pay any price just to get you.

Competitive M&A

MGM Resorts’ willingness to splash the M&A cash to bolster its LeoVegas business could be interpreted as a direct challenge to Entain.

Gauntlet: MGM Resorts CEO Bill Hornbuckle once again used his company’s earnings call with analysts to explicitly lay out what MGM is planning for its LeoVegas acquisition.

When announced in August last year, Hornbuckle said the buyout was a “great place to start” and on the most recent call he added that it was a business that can “grow and ultimately scale easily”.

Hornbuckle then outlined three “pillars” of potential growth. “We want to get into the content business,” he told analysts, suggesting there was a “long-term play” in enabling the switching of games from a digital realm to land-based gaming and vice versa.
“We're interested in live dealer,” he added. “There's nothing that suggests, given the nature of our business, that we should not be in that business.”
“And ultimately,” he said, MGM would want to “have our own sports-betting technology as well for the rest of the world.”

Putting on the Fritz: Hornbuckle namechecked MGM’s relatively new digital chief Gary Fritz as being a “big part of this”, and his role is worth dwelling on. He joined MGM from Barry Diller’s IAC in October last year where he was head of gaming. IAC is a digital media conglomerate and, importantly, has a 16%+ stake in MGM.

As sources pointed out, Fritz’s presence and his IAC background gives credence to this being a planned digital strategy away from BetMGM.
“The IAC connection, they’re no fools when it comes to digital businesses,” one advisor source suggested.
“They would be able to take anything decent and remodel it.”

To build a home: Hornbuckle gave a timeline on its ambitions, suggesting that within two to three years the team would “look back” and see it had “built something meaningful”.

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History repeating

The house that Kenny built: Of course, for Entain the company’s entire history is one of mergers and acquisitions. First under CEO Kenny Alexander and then the subsequent leaderships of Shay Segev and Jette Nygaard-Andersen, Entain has set out its stall as a serial acquirer.

As with rival Flutter, Entain has more recently been active with bolt-on deals, adding established or even relatively new brands in fast-growing or newly regulated markets.
In a recent note on consolidation trends in the sector, the team at Morgan Stanley pointed out Entain has “one of the most successful” M&A track records in the sector.

Recent deals in this vein include:

A £250m deal to buy Baltics operator Enlabs.
The £50m acquisition of esports operator Unikrn.
The C$300m deal for Avid Gaming in Canada
A €550m buyout of BetCity in the Netherlands.
The deal to buy a majority stake in SuperSport in Croatia for €600m.

Widening gyre: Notably, other recent deals have moved slightly away from the pattern of geographic bolt-ons. These include the $13m acquisition of the esports betting-odds provider Sportsflare and the recent $160m deal to buy live score app 365Scores.

Dazzle ships: Bolt-ons are “easy deals to make”, suggested one analyst source.
“You don’t have to explain a bolt-on as much as a merger and immediately after you have put the announcement out you don’t have to say anything more.”

Copycat

I want what he’s got: “M&A is always a pissing match,” said Paul Leyland from Regulus Partners, who pointed out that any advisor worth their salt will be hoping to generate some competitive tension between possible buyers.

But with Entain and MGM Resorts, the potential to get both sides wound up about what the other might be contemplating seems particularly ripe right now.
“Both of those companies are looking at the same businesses, peddled by the same people and broadly to the same ends,” Leyland added.

These two don’t get along: This comes against a backdrop of building tension between the two joint venture partners. One advisor source suggested that when MGM made its LeoVegas purchase it gave Entain only three hours’ warning.

“That went down like the proverbial lead balloon,” the source added.

MGM’s tanks on Entain’s lawn: The pair have history, with MGM previously having made a speculative $11bn takeover bid back in early 2021. In the wake of that, Entain’s spate of bolt-on deals began to look like a form of takeover defense, said one investment banking source.

“It’s a clear strategy,” they added. “You leverage your business to make it harder to take you over because you obviously become more expensive.”
But with Hornbuckle clearly signaling at the time of the company’s Q4 earnings call that MGM was no longer interested in buying Entain, the takeover defense has become less of a factor.
But far from ending the tension between the two, the official calling off of any takeover approach from MGM has only ramped up the competition between them.
“Entain now finds its JV partners emulating its strategy in terms of European M&A,” said the investment banking source.

All roads lead to…

The elephant in the room is always BetMGM. Sources pointed out that, while MGM is unlikely to reverse course on Hornbuckle’s comments, it is not hard to discern from recent proclamations that it continues to view the JV nature of BetMGM as sub-optimal.

As one source noted, Hornbuckle can’t just turn around a matter of a couple of months after going out of his way to rule a deal out with Entain and say “just kidding”.
But if they head down the route of building out their own online tech capability, then the conversation around the future of BetMGM might be different.
“I think MGM is putting all of the dominoes in order so it can push them over at the right time and end up with the joint venture under its entire control,” the source added.

The $6bn dollar question: A recent note from Peel Hunt suggested Entain’s share of BetMGM is worth ~£5.5bn. “Entain’s shareholders might like the prospect of getting, say, £6bn for their share of BetMGM,” said one advisor. “I don’t think it would be the worst outcome for them to take the money and run.”

“It could do a lot of things with £6bn,” they added.
Meanwhile, with the moving parts of the wider MGM business now moving in the right direction – notably Macau – raising the cash for a partner buyout might not be too much of a stretch.
I'm free to do what I want: What remains unknown is what the provisions are within the JV for what a departing partner can do in the US.

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French fries

The French lottery and gaming operator FDJ is on the hunt for deals.

Back in November during an investor day, FDJ laid out its strategy for M&A saying that it would be looking at the potential for managing other international lotteries and deals in both sports betting and iCasino.

“These developments will be capital intensive as achieved through M&A or needing upfront license fees,” said executive VP Pascal Chaffard.
“We will strengthen our diversification activities, payments and services, entertainment that can be achieved through bolt-on acquisitions.”
CEO Stéphane Pallez added that, while there was no specific country where FDJ would be looking, the company was ”pretty optimistic” there would be deals to be had.

The aforementioned note from Morgan Stanley made the point that FDJ had already tested the M&A waters with its November deal to buy ZEturf. That deal is still subject to approval from the competition authorities.

It also recently bought point of sale payments firm Aleda and payments management service provider L’Addition.

The MS analysts suggested the new strategy as articulated during the investor day “signals a shift to a broader approach, focused outside of solely France and including (unlike history) the potential prospect of online casino”.

Inside the deal – FansUnite

Scott Burton, CEO at FansUnite, talks about the company’s strategic repositioning.

May auld acquaintance be forgot: FansUnite recently completed the sale of the McBookie operation for C$5m as it continues its refocus towards the affiliate business and specifically its Betting Hero arm. According to Burton, the new objective for the company is to be cash flow positive by the end of this year.

“We will continue to look at possible sales or partnerships that support that strategy,” he told E+M.
To achieve this, the company will turn its focus towards high-margin cash flowing business units.
“The affiliate side of our business presents the best opportunity to generate positive cash flow and growth,” he added.

Tek titans: The sale of McBookie is the first corporate move since Tekkorp came into the picture as a major investor in FansUnite. “Tekkorp saw the value in the core assets we have and they share our vision on how to leverage those and significantly grow the business,” Burton said.

FanUnite sees the US affiliate space as a once-in-a-lifetime business opportunity, with regulated sports betting and iGaming rolling out quickly in a huge market.

Cheap trick: Burton noted how tricky it was to achieve good prices for assets with the current market being particularly tough.

He suggested an advantage FansUnite had when it sold McBookie was it was a “successful cash flowing business”.
“I think the trick is more about understanding who the buyers are and how it fits into their strategy,” he said.
“If you can find a buyer that sees a long-term strategic fit then it allows the seller to get a premium and the buyer to recognize value over time,” he added.

Bad to the bone: This was the case with the McBookie buyer, which allowed FansUnite to get a premium multiple in a bad macro environment but will produce good returns for the company over time and as part of its bigger vision.

“I believe this is a buyer’s market for M&A and with the board we have and Tekkorp’s team we see every deal in the space,” said Burton.
“A key motivation for us wanting to have Tekkorp involved was to help guide us through future strategy, which would include M&A.”

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The transaction month

GeoComply: As was announced just yesterday, the geolocation compliance specialist has bought OneComply for an undisclosed sum. The 14 employee-strong OneComply is led by co-founder and CEO Cameron Conn and CTO Aaron Gould, and like GeoComply is based in Vancouver.

“First and foremost, we are clients of OneComply and we think they are brilliant,” GeoComply chair David Briggs told E+M. “It’s got a lot of growing to do within the gaming sector.”

Better Collective: Also in the past month, the Copenhagen-based sports media/betting affiliate Better Collective sealed the deal with UK-based adtech group Skycon for £45m in cash and earnout.

Calendar

May 9: Genius, IGT, Bally’s, Century, L&W, Wynn, AGS
May 10: Sportradar, Inspired, Everi, Golden, NeoGames, GAN, SBC NA day 1
May 11: Raketech, Codere Online, SBC NA day 2

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