Analysts answer the key questions as DraftKings moves for Entain

Why does DraftKings want Entain?

Regulus Partners It is quite easy to see what DraftKings likes about Entain. The US company, which is forecast to make circa $1.8bn in revenue in 2022 would scale up to a $6.8bn revenue group (excluding MGM JV) with a much lower dependence on the ‘economically unproven’ dynamics of the US market. Even more importantly, a business that burned through $280m of cash in H121 gets a business that should generate circa $500m of FCF annually, although somewhat scarily that still means the potential for net losses at current US burn rates. The combination’s current balance sheet would be a flexible $3bn in cash, with $1.2bn of convertibles and $2.8bn of long-term debt, excluding leases. That would be manageable even in ‘investment mode’, although it might be subject to change depending on the cash element of any deal. Given that DraftKings’ stock is trading at a roughly comparable market cap to Entain ($22bn versus $18bn), this is very much having one’s cake and eating it, in our view. There may even be some synergies. Numis Number one is scale benefits. Operating leverage is well understood, and this would treble DraftKings’ revenue base. Number two is technology. Entain has the leading cross-product proprietary tech stacks in the industry. Number three is geographic diversification. DraftKings has little international exposure outside the US. Number four is product diversification. Better balance between sports, which is DraftKings’ significant majority, and gaming, despite last month’s $1.6bn all-share acquisition of Golden Nugget Online Gaming. Number five is simply because it would be cash generative to support continued US investment. Peel Hunt We can see the strategic sense in DraftKings acquiring Entain. It brings it global reach and a market-leading technology platform, along with the cash flow to drive growth globally. The sticking point for any deal is likely to be valuation, naturally, but also – critically for many shareholders – the proportion of cash in the offer structure.

What would a deal between DraftKings and Entain mean for BetMGM?

Numis BetMGM is the key obstacle. We think DraftKings would have to carve out Entain’s stake in BetMGM like Caesars did with William Hill, and not just because of anti-trust due to market share but because of the way the JV was initially structured. MGM has stated that having control of the BetMGM JV is important and will engage with Entain and DraftKings as appropriate. The JV has been highly successful having doubled market share to 22% over the last year thanks to the strength of its brand and leveraging Entain’s technology to monetise MGM’s customer base. MGM may also return to the table. We think this approach may encourage another approach from MGM, having its initial offer of £13.83 per share rejected in January. On the same terms, this now implies £19.15, but MGM also has a stronger balance sheet with a $4.4bn cash inflow expected from asset sales in 2022 and therefore could bid higher. Yesterday it reconfirmed its desire to become a “global gaming entertainment company”, a natural fit with Entain.

Regulus Partners The most complicated bit, which is also probably the answer, is Entain’s JV with MGM. It should be remembered that MGM tried to buy Entain earlier this year. From a simple share price now versus then perspective, Entain did the right thing to reject the bid. However, MGM is Entain’s big bet on the US and from a purely revenue standpoint the JV has been going extremely well. However, JVs are difficult to manage at the best of times and there is likely to be plenty of pressure to find a solution. MGM was not bidding for Entain for exposure to the UK or Germany. If MGM wants a tidy exit, DraftKings can easily give it that. Equally, if MGM really wants a tidy exit, then it would be difficult for Entain to stand in the way of any deal. Essentially, MGM can probably hand Entain to DraftKings in return for its own strategic freedom, in our view, or else counterbid. There is perhaps some irony that the jewel in the crown of Entain’s performance and valuation portfolio is the one asset that it has not fully bought and controlled, and that asset is the one that will ultimately decide Entain’s M&A future.