Deal Talk #4
Flutter wins the (Fan)duel with FOX, MGM and Entain tensions ramp up, Kindred buyer left hanging +More
In this issue:
Why Friday’s tribunal decision in favor of Flutter clears the path to a FanDuel IPO.
The only deal in town: will MGM/Entain ever happen?
Scandi froid: is there anyone on the end of the line at Kindred?
FanDuel’s IPO glide path
The big takeaway from the decision by the arbitration tribunal is that the path will soon be cleared for a FanDuel IPO.
Clearing the decks: Early in 2023 the arbitration tribunal deciding the dispute between Flutter and FOX over the latter’s stake in FanDuel is set to rule on what, if any, conditions can be attached to a potential listing for FanDuel in the US. Going by the extent to which the findings last week very much fell in Flutter’s favor, it is not expected the tribunal will add any further obstacles.
“This was the last blocker,” suggested one corporate advisor. “Flutter can do what it wants now.”
Analysts at JMP said the overhang was “nearly gone”, leaving Flutter to “unlock immense value through an IPO”.
Whether FOX would even be able to participate is another question entirely. It is debt-laden already – $7bn as of its last earnings – and likely unwilling to face the licensing that would come with an 18%-plus stake.
It is the licensing issue that also accounts for the likelihood it will walk away from FOX Bet when, as per its agreement with Flutter, each can exit as of August next year.
Patience is a virtue: However, those that E+M spoke to on the matter suggested that an IPO will not be imminent, with market conditions simply not favorable. “You wouldn’t want to IPO right now because the market is dead,” said one source.
The analysts suggested the fair market value as determined by the arbitrator is well above the multiple at which online gaming is currently trading.
Wells Fargo said the market was unlikely to “suddenly ascribe” the arbitrator’s current valuation of $22bn to FanDuel.
This represents a revenue multiple of 6x vs. the current 2x valuation for DraftKings.
Over and above market considerations, Flutter will also have to determine its strategy from here. “I’m sure they would try and keep control,” said one source, suggesting they would retain control of at least 50.1% of the shares.
Then there is FanDuel’s level of dependency on the parent. It may well reach adj. EBITDA profitability in Q4 but that doesn't mean it is cash flow positive as yet.
“It probably needs consolidating for a while yet,” said the source. “Deny it the wonderful Flutter P&L and has FanDuel got the resources or does it still need the backing?”
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MGM and Entain seek resolution
The betting and gaming sector’s own Kramer vs. Kramer over the future of the BetMGM joint venture is set to run for a while yet.
A strange Mexican standoff: It may not yet be overt but under the surface it is believed that tensions are building between MGM Resorts and Entain over the future of their relationship. While MGM has made it abundantly clear it would like to own 100% of the business, it has yet to articulate how it would go about obtaining full control.
The cleanest and most obvious solution would be to buy Entain as per its original $11bn approach that was rejected in January 2021.
The bid wasn’t entertained by Entain, which said it “significantly” undervalued the business. Since then Entain has rejected a bid from DraftKings, which valued the business at $22.4bn.
That deal fell through in part due to BetMGM complications.
There’s no other way: According to sources, it is the last factor that has fed the idea that MGM is the only ‘natural’ buyer of Entain. It raises the question why MGM is yet to come back to the table. And the answer is, it’s complicated. To fund any deal, MGM is likely to use a combination of debt and equity and unfortunately there are question marks around both elements right now.
Debt: As previously detailed in Deal Talk #1 in relation to the aborted Playtech takeover talks, debt is expensive right now. “The capital markets aren’t there to support a cash bid,” suggested one dealmaker.
MGM has cash on the balance sheet; per the Q3 earnings presentation, it has ~$5.9bn of liquidity as of the end of September, ex-MGM Macau.
However, large portions of that will be needed for its IR developments in Japan and New York.
Equity: The other problem is share price valuations. Doing a deal during the current turmoil would be difficult anyway without the issue of what is the true valuation for each party.
Entain looks cheap at present due to the problems afflicting sterling, but UK investors are unlikely to welcome an offer that takes advantage of that fact.
Meanwhile, issues still remain over any paper-based deal because of UK institutional investors being unable to accept US shares.
The lion’s share
Raw meat: The surprise move in recent months was the buyout of LeoVegas, a deal that confounded expectations about MGM’s direction of travel. On the recent earnings call, MGM CEO Bill Hornbuckle said the LeoVegas deal represented an “aggressive expansion in international and online gaming” for his company.
As one industry insider put it, MGM “clearly likes the LeoVegas tech” and believes it can be “the basis for a rollup strategy”.
But at the same time, as another source suggested, “if BetMGM was working perfectly you wouldn't do that deal”.
Look busy: Entain, of course, isn’t standing still. It recently raised £1bn to fund its SuperSport buyout/joint venture and “very much sees itself as an acquirer, not an acquiree”, in the words of one advisor.
The litmus test: One piece of business completed by Entain this year is the acquisition of the Canada-facing Sports interaction in February for C$300m.
The deal augmented Entain’s position in Ontario, a market BetMGM has also entered. “They are competing with each other in Canada and that is sub-optimal,” said one source.
“MGM can try to take advantage of Entain's lack of cash and trigger the buyout mechanism in the JV agreement – but can’t do it until it (or LeoVegas) has a viable alternative to the Entain tech stack and specifically the sports book,” said one industry figure.
Eye of the beholder
Eat the make up: Entain comes with baggage. It has recently made much of its ‘EntainSustain’ CSR efforts and talks of its regulated revenues. But some of this remains ‘regulating’ such as Brazil and German online casino, while in the UK it keeps getting tripped up by historical responsible gaming failures and it is under investigation for AML failures in Australia.
“Entain is uglier than it looks and MGM knows that,” said one source. “MGM would have to own it, warts and all. They wouldn't be able to claim ignorance.”
Another way of putting it is, as another consultant in the space explained, is to view Entain as a curate’s egg. “It’s good in parts, not so good in others.”
In an ideal world… MGM would have an arm’s length relationship with a JV partner in the rest of the world and own the US outright. “It’s got the whole situation the wrong way around,” said one source.
What is the catalyst? The impasse is proving to be long-lived and could last for a while yet. Should Entain’s prospects deteriorate significantly, its shareholders might be more willing to listen to offers. But it is hard to see what would cause such a downturn.
Another potential catalyst is the ongoing performance of BetMGM. As it stands, despite what appears to be frosty relations, the business is performing well. Were that to change, it might act as an accelerant for change.
One other catalyst would be if Flutter managed to successfully get a FanDuel IPO away. But that might take some time (see above).
“I can see this rumbling on,” said one corporate insider. “Institutional investors will just say, ‘let’s look at this in another year’s time’.”
“This might also be about waiting for BetMGM to break even and then reassess.”
Scandi froid
Since May activist investor Corvex has been agitating for Kindred to find a buyer, but according to sources that message might not have yet reached the management.
Cold cuts: Ahead of its Q3 earnings, Kindred announced that it had welcomed James Gemmel, a partner at the activist investor Corvex, to the board. Having initially made a foray in May to grab 10%-plus of the company, Corvex has recently upped its stake to 15%.
Talking about the appointment of Gemmel, Kindred said he would bring “significant experience working collaboratively with management teams and boards of directors to create shareholder value”.
Hanging on the telephone: The suggestion from sources is that Kindred needs the help. According to the gossip, an approach from a sizable entity about a potential buyout bid effectively failed to get past the receptionist.
“Maybe it’s the Scandi way, but they literally blew us out for three-and-a-half-weeks,” the source said.
“This was a lack of interest from them. I know the Scandi takeover rules are very difficult, so maybe that makes the management feel safe.”
“I was shocked the CEO didn’t even get on the phone.”
The month in transactions
Penn and GLP announced they would be working on $850m of new projects, part-funded via a new $575m master lease agreement.
Gaming affiliate provider Acroud finally unveiled its under-wraps €5.1m acquisition – which E+M revealed was Catena Media’s paid media division.
Cashless payments provider Sightline Payments said it had received a strategic investment from JP Morgan.
As in the above article, Entain announced the details of an upsized £1bn term loan to cover the €600m acquisition announced in the summer of SuperSport.
Betsson bought the Vilnius-based sports-betting tech provider Kicker Tech for €14m.
BetMakers technology snapped up Punting Form for A$3m to enhance its B2B horse-racing offering.
Scott Longley scott@clearconcisemedia.com
Jake Pollard jake@openmediaservices.com