On Tuesday, sports betting and sports betting giant DraftKings made a $ 22.4 billion offer to acquire UK online sports betting company Entain, operator of BetMGM and owner of brands such as Ladbrokes and Coral Betting. .
The potential deal has already gone through several iterations and may require further changes as MGM’s holdings, deal structure dynamics, and valuation considerations come into play.
Here is a brief overview of the current situation:
- If completed, the $ 22.4 billion deal would be the biggest to date for DraftKings and the sports betting space in general.
- DraftKings made two initial offers: first at $ 34.15 per share (rejected), then retaliated with an offer of $ 38.23 per share representing a 42% premium to the share price of Entain at the close of the market on Monday.
- It is expected that 22% of the offering would come in cash form while the remaining 78% would come in DraftKings shares.
- Net debt estimated at $ 2.73 billion at year-end would bring the total cost to DraftKings to around $ 25 billion.
- The deal would price Entain at 22 times the expected earnings in 2022, up from a multiple of 13 times the sales for 888’s purchase of non-U.S. Properties from William Hill earlier this month.
- After the potential deal was announced, Entain shares closed the day up 18% while DraftKings shares closed 7.4% lower that day.
It should be noted in the above figures the cash and stock split from 78% to 22% for the purchase. Although DraftKings has cash on its balance sheet and Entain’s net debt amount is relatively small, the proposed transaction structure would likely leave the combined entity heavily in debt.
In order to pay the ~ $ 5.5 billion in cash to current Entain shareholders, DraftKings would need a significant increase in its current debt burden to close the deal. Not the most attractive of proposals.
Also note: the total cost of acquiring Entain would essentially be equal to the current market capitalization of DraftKings. At the time of writing, DraftKings is valued at $ 21 billion and remains a largely loss-making company. This is expected given the age of the business and the speed at which it is expanding into new markets and verticals, but it’s still a reason for a slight hiatus.
It is difficult to see the ramifications of this potential successful transaction in a vacuum. In order to better understand what the merger could mean for sports betting, it is important to understand two main topics.
MGM and Entain are partners in a joint venture
One issue complicating the deal is the fact that Entain’s most attractive asset – BetMGM – comes from a joint venture the company has with MGM, which has made clear its intention to own Entain for some time now.
In January, MGM made an $ 11 billion offer for Entain which was quickly rejected. At the time of the proposal, Entain’s share price was hovering around $ 15 and the deal proposed by MGM would have valued those shares at around $ 18.9. At the time, the sentiment among analysts was that Entain’s value was closer to $ 22.4 per share at a valuation of $ 13.2 billion at the bottom of the scale.
Overall it was a low ball effort from MGM.
Although the merger was unsuccessful, companies are inexorably linked to the hip – for the moment.
- In 2018, MGM and Entain signed a $ 200 million deal to create the US sports betting platform known as BetMGM.
- In July 2020, the deal received new investment from both sides, bringing the total value to $ 450 million.
- MGM has expressed unhappiness that it has ceded all control (not to mention 50%) of BetMGM to Entain in the first place and would like to “own more”, according to management.
Given the sentiment emanating from MGM, as well as its ability to veto an outright buy from the 50% share, DraftKings would likely have to sell Entain’s 50% share and make do with the base of non-US assets and the technological capabilities that Entain has to offer.
Earlier this year, BetMGM said it expected to have operations in 20 states covering approximately 40% of the American adult population by the end of 2021. The growth comes as governments of pandemic-stricken states seek to generate much-needed tax revenue from the gaming industry.
The joint venture projects its revenues to grow from $ 178 million in 2020 to $ 1 billion in 2022.
DraftKings spent nearly $ 1.7 billion on mergers and acquisitions this year
Wouldn’t be DraftKings’ first major purchase of the year. To date, the company has engaged in various purchase transactions while spending nearly $ 1.7 billion in total. Here’s their 2021 receipt, so far:
- March: Acquisition of the sports betting broadcasting network VSiN for $ 70 million
- April: Acquisition of a stake in Meadowlark Media, owned by John Skipper, for a valuation of approximately $ 13 million
- April: Purchase of iGaming BlueRibbon for $ 22 million
- July: Acquisition of LinkSquares, a tool for analyzing legal documents, for $ 40 million
- August: Acquisition of Golden Nugget Online Gaming for $ 1.6 billion
Historically, DraftKings has worked tirelessly to acquire customers through various channels.
Acquisitions are all indicative of one thing – DraftKings tries to push its growth towards hyperspeed. Capital deployed on targeted media assets and high-customer iGaming assets has been a major factor in increasing the company’s revenue forecast since its last earnings call.
When the May results were called, the revenue forecast was increased from $ 900 million to $ 1 billion, which implies a growth of 79% year on year. With the impending closing of the Entain purchase, DraftKings is expected to evolve at a rate that could allow it to carve out the “lion’s share” of the sports betting market.
While the growth outlook is compelling, not all aspects of the deal can be seen with rose-colored glasses. So far, investor sentiment has been less than exuberant. Over the past five days, DraftKings stock has lost 11% following news of the potential merger.
While the wider market may seem a little scared, at least one industry VIP was ready to seize the opportunity to acquire more DraftKings shares at a discount.
Technology investor and futurist Cathie Wood on Wednesday bought for $ 40 million more shares in DraftKings through its ARK Innovation and ARK Next Generation Internet funds. The move shows that ARK and Wood continue to believe that DraftKings is set to take online gambling and sports betting by storm.
While a merger and acquisition deal equal to the acquirer’s full market cap is something that doesn’t really make me jump for joy, I see the way forward for DraftKings. Besides, who am I to bet against Cathie Wood?