Entain Shareholders Should Know When to Walk Away By

© Reuters.

By Geoffrey Smith — The new year has started with a variation on what’s now an old theme – a U.S. casino operator trying to buy a U.K. bookmaker, desperate to build up its capability in online gambling.

The new spin is that the British-based company is driving a harder bargain. Entain  (OTC:), the owner of Ladbrokes (LON:) and online sports betting site Bwin, on Monday rebuffed an all-share offer from MGM Resorts (NYSE:) that would have valued the company at $11 billion – 22% more than its year-end closing price – and given its shareholders 41% of the combined group. For comparison, Caesars Entertainment (NASDAQ:) only had to shell out around a quarter of its market value when it bought William Hill in a similar deal in September.

Entain said on Monday it “has informed MGMRI that it believes that the proposal significantly undervalues the Company and its prospects.”

Clearly, a platform that allows gamblers to scratch their itch whenever they feel like it, even when socially distanced or locked down, has a lot going for it in the time of Corona.

Just as clearly, online sports betting has a better long-term growth trajectory than the brick-and-mortar casinos that are MGM’s stock-in-trade. Even in a generally stagnant European economy, online gambling is growing at a clip of around 10% a year, according to figures from the European Betting and Gaming Association. Much faster growth in likely in the U.S., where a more conservative regulatory environment means the industry is still immature.

The market is betting that Entain has the better hand. By mid-morning in London on Monday, Entain’s stock had settled into a range 3%-4% above the 1,383 pence price implicit in MGM’s latest offer, suggesting that a higher bid is expected.

However, MGM also has good cards of its own that will stop management from diluting its own shareholders too far. It’s already the distributor of Entain’s technology in the U.S., where the two have been joint venture partners since 2018.  That partnership already covers Nevada, New Jersey and Indiana and is set to cover 20 states by the end of this year. That will inhibit any search for a counterbidder, should Entain’s management try to turn this into an auction. Such concerns were one reason that William Hill ultimately went to its existing JV partner than to a rival bid from private equity last year.

Moreover, Entain still has a U.K. tax investigation into suspected improper dealings by a former Turkish subsidiary hanging over it, while the outlook for its Ladbrokes and Coral betting shops in the U.K. is still far from rosy. There may be no need to run from the table, but shareholders in a company that had scored four straight annual losses while building up its technology of the future should realize that this is as good a time as any to walk away.

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