Situation vacant
The lack of a new CEO at Entain reflects the size of the task ahead
Whoever takes on the job of CEO at Entain has their work cut out.
+More takes on Entain, Flutter, Draftkings and Golden Entertainment.
Alberta provides for some read-across from Ontario.
Spirable founders take Genius to court over earnout dispute.
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Your mission should you choose to accept: It is six months since previous CEO Jette Nygaard-Andersen stepped down, which reflects both the difficulty in finding a replacement and the size of the task facing the new chief of Entain.
Much ado about nothing: The “dampest of squibs” strategic review, which concluded that only Georgia-based Crystalbet was surplus to requirements, was met with some skepticism. Ivor Jones, analyst at Peel Hunt, commented: “I assume that if there were any offers for other parts of the business, they were not at the level the board thought worth pursuing.”
Regarding the company appointing Moelis to look for buyers, Jones added that he “can’t imagine them changing their minds and deciding that everything was fine.”
A former Entain executive, meanwhile, suggested the comoany was “giving the activists a bone.”
“With people rioting on the streets of Tbilisi about Russian influence, it’s easy to tell people it’s non-core,” they added.
An outrage: Recall, the strategic review was prompted by activist investor Eminence Capital, which slated Entain over last summer’s $750m STS buyout, suggesting the deal was “perplexing on many levels.” Eminence was rewarded for its activism with a seat on the board..
Discerning Capital managing partner Davis Catlin, a current shareholder, was supportive, suggesting the subsequent departure of chair Barry Gibson was a “positive step.”
It’s the tech, stupid: But changes of personnel are not enough. Despite all the M&A brickbats, insiders suggested the Capital Allocation Committee has come to the conclusion that rather than the acquisitions being the problem, it is the platform and operational efficiency that were not up to scratch.
“There are layers upon layers upon layers of management,” said the former exec. “Decisions take far too long. They get trapped in the system.”
Shareholders are “paying the bill for at least seven years of over-promising and under-delivering” on M&A synergies and integrations, suggested Catlin.
Migration watch
Everybody get together right now: There has been a change of tack from management on the need for integrations, which does not feel fully resolved with 35% of the company’s operations remaining on acquired platforms rather than the core Entain platform.
Just you wait: But interim CEO Stella David has rowed back on previous promises to migrate all the acquisitions to Entain’s own platform, saying instead there are no plans “at the moment” to move the other businesses from their platforms onto the core platform.
The reason being, she added, is they are “running off very good platforms that are in-house anyway.”
Finding fault: “You can’t migrate everything to the core platform because it’s not up to scratch,” said the former executive. “The more jurisdictions you add, the harder it has to work. Flexibility is the issue and it will take time and money to fix.”
“They need to admit what is broken and dig out of the technical debt over the next year or two,” added Catlin.
“If they can remove the tech issues, they should be able to grow earnings, trade at a higher multiple and become an attractive acquisition target."
The elephant in the room: And what about BetMGM? The Capital Allocation Committee said “winning in the US” was crucial to the future with much resting on the capability within recent acquisition Angstrom.
But Roberta Ciaccia, analyst at Investec, was not alone when she said she “can’t see how BetMGM remains a joint venture for the foreseeable future.”
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No room at the inn
Downward dog: Speaking of Investec and Entain, the team issued a note in early July suggesting the negative trend evident in Q1 was likely to have continued into Q2, with online in the UK & Ireland still down a high single-digit percentage and international down marginally. But they added that the UK is likely to turn around in Q3 as the impact from the introduction of safer gambling measures from last year leads to easier comps.
The new no. 1: The team at JMP said last week that Flutter is the best of the online bunch, with it being the largest brand in the US, having “best-in-class” management and offering investors a hedge against US regulatory action, as well as a global footprint that generates $2bn of EBITDA growing at a high single-digit rate.
The JMP analysts added that FanDuel, with 46% OSB share and 27% in iCasino, would be able to drive incremental and monthly players and revenue as companies pull back.
“Flutter/FanDuel is the most equipped through its global platform, strategy and balance sheet,” the team added.
“Flutter has the pieces, not just a single database or brand, to drive an advantage over mid- and small-scale competitors.”
DraftKings: “Incremental questions” is how Deutsche Bank gently suggested some increasing skepticism over DraftKings’ long-term adj. EBITDA guidance of $2.1bn, saying it is “becoming increasingly more questionable over the next 12-18 months.”
For Q2, DB are predicting gross margins will fall YoY due to higher acquisition costs, lower than expected hold and a heavier mix of revenue from higher tax rate jurisdictions.
In trimming their Q2 EBITDA forecast to $134m from $175m, the DB team noted they viewed momentum in DraftKings as “somewhat stunted.”
No vacancies: The closure of the Mirage and the Tropicana will see a near 5% contraction in room supply on the Strip, which the team at CBRE suggested “sets the stage for a favorable rebalancing of supply and demand and a potential earnings catalyst for Strip operators.”
The analysts estimated the then MGM-owned Mirage had ~1m occupied room nights and generated $596m of revenue and $169m of EBITDAR in FY23.
Johnny guitar: With new owner Hard Rock taking it out of circulation until 2027 as it refits the property, it leaves “significant underlying demand” that will need to find a home.
“The significance and longevity of the supply contraction remains underappreciated, if appreciated at all,” the CBRE team argued.
Golden Entertainment: Meanwhile, CBRE has adjusted its revenue and EBITDA targets downwards for the operator of the Strat off the back of continued weakness at the tower end in Las Vegas and increased labor costs. The analysts noted the expected cooling of the promo environment had failed to materialize in Q2 and was persisting longer than expected.
Alberta rising
Follow the leader: The potential for Canada’s fourth-largest province, Alberta, to follow Ontario and open up the market to commercial operators could be a catalyst for the share prices of major global operators, according to the team at JMP.
Suggesting the market could be worth over $700m at maturity, the JMP analysts noted this would make it the eighth-largest jurisdiction in North America with sports betting potentially worth ~$200m and iCasino producing up to $533m.
Not so simple: Somewhat less enthused by the move were the team at Regulus. While admitting that “on a political level Alberta’s position is both refreshing and positive: clear, open and following a proven neighboring licensing model,” they went on to warn that “simple does not always work.”
“We suspect a combination of civil servant concerns, lobbying and genuine differences between Ontario and Alberta will make the path of an open framework more challenging than early indications suggest,” the team argued.
Size matter: The most obvious difference is size, Regulus pointed out. While Ontario is a market of nearly 15m people, Alberta is less than a third of this. “Market size matters in open regimes because the economics of industry hope and the reality of effective compliance tend to clash,” the team added.
The likely outcome is that all Ontario licensees gain an Alberta license. But that would mean each individual licensee would achieve average revenues of ~US$14m. Alberta might take the view that the economies of scale between Ontario and Alberta might justify such under-powered licensees.
“But this essentially requires almost complete regulatory harmonization between the two jurisdictions,” Regulus added.
Pattern recognition: Meanwhile, JMP said the existing gray market and DFS brands would likely dominate any regulated market, suggesting it would likely follow the pattern of Ontario where bet365 and theScore have been successful.
Recall, EKG said recently that Stake.com was currently the dominant player in the gray Canadian market with ~20% market share.
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Inside (earn)out
Spiraling out of control: A London court case involving Genius Sports and the former owners of the adtech business Spirable, which it bought for $37.5m in cash, shows how the relationship between the founders and their new owners quickly deteriorated over the level of earnout.
Genius Sports bought the Ireland-based Spirable in August 2021 to enhance its data-driven video marketing capabilities, including its betting and gaming client base.
According to court documents seen by Sportico – filed by previous owners Dave O’Meara and his brother Ger O’Meara – alongside the initial cash, Genius offered an earnout of $17.5m depending on hitting “technical targets” as well as key personnel remaining with the business.
The total cash and earnout of $55m represented a hefty multiple for a business that generated revenues of $2.8m in 2021 and net losses of $2.1m.
Not a happy marriage: However, as the legal documents seen by Sportico detail, the relationship between the O’Meara’s and Genius soon deteriorated after Genius first said targets had been met before then changing course to say they hadn’t. The Spirable founders also contend that just enough executives were fired to get below the figure needed to achieve the retention earnout.
Fail harder: In its own legal response, once again as seen by Sportico, Genius Sports admits the acquisition was “not a success.” It said it was “unimpressed” with the output from Spirable and that individuals within the business “were slow to grasp the technology employed by [Genius Sports] and made slow progress on their various projects.”
“Simultaneously, they placed greater and greater demands upon [Genius’] resourcing, and displayed an inappropriate fixation on achieving the various earnouts,” Sportico quoted from the legal document.
The case continues: Sportico noted the case is ongoing, adding that arbitration between the two parties failed in the spring and that discovery is now underway.
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Calendar
Jul 19: Evolution, Betsson
Jui 24: Kambi, Churchill Downs (e)
Jul 25: Churchill Downs (call), GLP (e), Boyd Gaming
Jul 26: GLP (call)
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