Description

Background

Entain is a leading UK-based online and retail betting and gaming company. Formed after the merger of GVC and Ladbrokes Coral in 2018, its stable of 30+ brands include Ladbrokes, Coral, PartyPoker, bwin (in Europe, esp. Germany), Betcity.NL, STS (Poland), Enlabs (Baltics, Nordics) SuperSport (Croatia), and Sportingbet (Brazil). Entain generated GBP 18B in sports wagers and 71% of revenue / 25% of Underlying EBITDA from Online and the remainder from Retail operations in 2023. Entain's Ladbrokes and Coral brands are the leading retail footprint in Uk with >2,000 locations. 

Entain also owns 50% of BetMGM, the online betting company established in 2018 in partnership with MGM, with Entain providing the tech stack and MGM bringing the brand/US footprint and regulatory cover. BetMGM operates in 29 markets in North America.

In Online, Entain's largest markets are UK/Ireland (22% of NGR), USA (18% via BetMGM), Australia (10%), and Italy (7%). The Retail business is 74% UK/Ireland. By comparison, in terms of TAM, the US is 21% of global online GGR, UK (~15%), Italy (8%), Australia (6%), Brazil (5%), and rest of Europe (38%). 

The Set-up

Entain shares have been a value trap in recent years, falling 50% just over the past year despite trading at a discount to multiple takeover offers and the perception that the BetMGM business could essentially be obtained for free (or less) via Entain shares. For a good recap of the situation a couple of years ago, see the write-up from tim321 in February 2022. Entain shares now trade ~50% below the MGM takeover offer from early 2021 and ~75% below DraftKing’s subsequent (all-stock) offer.

The disastrous results for shareholders reflects a confluence of factors: 

1. Entain's businesses, especially but not exclusively UK online, have faced extreme regulatory headwinds, both company-specific and industry-wide. Entain reached a deferred prosecution agreement with UK HRMC in December 2023 to resolve legal issues with its legacy Turkish business (sold in 2017), settling for a record GBP 585M fine. The UK online gaming market has also adjusted to the longtime-coming Gambling Act Review publication in April 2023. Restrictions have also tightened or are tightening in Italy, Germany, NL, Australia, and Ireland among other markets.

Strict bettor affordability measures and wager limits in the UK as well as regulatory headwinds in other markets led to a 6pp headwind to online NGR in 2023, Entain estimates. Overall (ex-BetMGM), Entain net gaming revenue (NGR) declined (2%) on an organic basis in 2023, with online down (3%), and UK online NGR declined (6%). Entain estimates regulatory headwinds were a (10%) headwind to online NGR in the UK and they will continue to weigh on results in 2024.  

Overall EBITDA increased just 1% on 11% revenue growth in 2023, reflecting higher taxation and inflation as well as M&A benefits.

2. BetMGM has been bleeding share in the US, especially in sports betting, to market leaders DraftKings and FanDuel. While BetMGM claims 14% total share in iGaming and sports betting (3 months ending November 2023), this is down sharply from a reported 18% in 2022. BetMGM’s 36% growth in NGR in 2023 to $1.95M likewise trailed estimated overall market growth of 43%. Furthermore, Bet MGM’s iGaming share is 20%+ vs single-digits and declining in the much larger sports betting category. EKG (Eilers and Krejcik) estimates their share of sports betting at 6.4% in 1Q24, down 80 bps Q/Q and 220 bps from 2023 averages. While EBITDA turned positive in 2Q-4Q23, full year EBITDA loss was $67M. Now management say that 2024 will be another “year of investment” as the JV tries to stem the share losses, rather than an inflection toward positive FCF.

3. Entain’s capital allocation policy has been highly questionable. Entain has spent GBP 2.0B on acquisitions over the past 2 years. Entain acquired STS, the leading online sports betting platform in Poland, for GBP 750M in 2023 or ~12.5x trailing EBITDA and largely funded the deal with a GBP ~600m equity issuance at a highly dilutive implied multiple (especially factoring in BetMGM value). Even with this, net debt has grown to >3x PF Adj. EBITDA.

The situation ultimately led to the dismissal of CEO Jette Nygaard-Andersen in late 2023. Board member Stella David stepped into the CEO role on an interim basis, but the company has yet to find a permanent replacement, with multiple prime candidates reportedly uninterested. Activist shareholder Eminence Capital’s head Ricky Sandler joined the board and Entain formed a new capital allocation committee in response to the shareholder unrest, but the immediate outcome is uneventful. On 21 May, Entain announced that the committee concluded its strategic review and essentially just rubber-stamped the current plans. The only real announcement was that the Georgia brand Crystalbet is non-strategic and could be disposed of…basically, a nothingburger. 

MGM Expanding Online Independently

Following the failure to reach an agreement to acquire Entain in 2021, and the subsequent market share losses at BetMGM, MGM has instead moved to assert an independent online strategy internationally. MGM acquired LeoVegas, an online gaming company in 9 countries focused on the Nordics, in September 2022 for $556M. 

Then, MGM launched BetMGM.UK in August 2023, using LeoVegas’ technology for igaming. LeoVegas is reliant on B2B provider Kambi for sports betting, but MGM has indicated it expects to acquire assets to internalize this function soon. MGM also noted in March that they are considering markets in LatAm. LeoVegas already entered Brazil in 2019 and the country is finalizing an online gambling regulatory framework after passing legislation at the close of 2023. 

MGM CEO Hornbuckle stated in March 2023, 

“The simple answer on Entain is no, we've moved on. Why we remain highly focused on BetMGM's business through our partnership with Entain and making sure that business continues to grow, we see great potential in LeoVegas' expansion capabilities. I've said before, we like their technology platform and their leadership team. We're also interested in the content studio business. We think there's a real play there. We've seen that proven effective with brand when we combine great product in our brands at BetMGM. And over time, we like the live dealer business and the expansion of other global markets and frankly and directly our own purview. 

So for now, the answer is no, not with Entain. We're going to go down our own direction, and we began to allocate capital. We think Gary Fritz has got the right motto, the right drive, and the right person to help us lead this forward. We value the relationship with Entain. We value BetMGM. But as it comes to rest of the world, we're going to move forward with a different proposition”

Upside: Upgraded Product & Angstrom/Parlay Opportunity

So what’s to like in this sh*tshow? For one, Entain is clearly feeling their feet held to the coals by both investors and MGM alike, albeit belatedly. 

First and foremost, BetMGM has a real opportunity to turn around their sports betting market share and improve their hold by upgrading their betting platform–and Entain is now addressing this at speed. Entain acquired Angstrom Sports in October 2023 for GBP 81M plus contingent payment of up to GBP 122M. Angstrom provides data analytics, forecasting, and sports modeling expertise that is essential for oddsmaking, especially for in-play betting and parlays/single game parlays (SGPs). BetMGM’s parlay offering is historically sub-par relative to FanDuel / DKNG, reflecting lack of oddsmaking expertise and inferior integration into the betting product. For example, in Illinois, which breaks down revenue, MGM’s share of parlay revenue was just 3% in February. 

The Angstrom acquisition should enable BetMGM to vastly improve its parlay and single-game parlay (SGP) offering. This is key not only for generating betting volume, but crucially, parlays are much higher margin (when priced correctly). The importance cannot be understated. MGM CEO Hornbuckle noted in March that FanDuel/DraftKings’ take rates are 200-300 bps higher principally due to parlays. NJ data from 2023 also is instructive, indicating 18% margins on parlays versus 8% overall and MSD for traditional sports betting. Parlays contributed an astounding 54%+ of total casino winnings in NJ.

2023 Stats - NJ DGE

BetMGM CEO Adam Greenblatt recently described in an interview with EGR,

 “The ability …I would go as far to say the fact that players love parlays and same game parlay products here in the US is a lifeline to the digital sports betting industry. Otherwise, margins are extremely tough to make a highly profitable business out of. Same game parlays with margins of 15% or more, you can build a business around that.”

New App Upgrade & Partnership

BetMGM began rolling out the new parlay capabilities earlier this year and initial commentary/data points look positive. EKG called the new SGP capabilities an “immediate upgrade” in April and said the new MLB parlay offering was “closer to parity” with DraftKings and FanDuel. BetMGM also disclosed on May 14 that the app has seen a 209% increase in MLB home run prop bets in the first month of the season versus 2023, driven by the Angstrom integration. 

BetMGM has also made other recent upgrades to the app, such as creation of a single app / single wallet (SASW) across state lines. Multistate bettors contribute 25% of NGR per MGM and are 1.5x more valuable. Crucially, BetMGM launched omni-channel capabilities in Nevada in January 2024 and expected to get single wallet licensing in Nevada by late spring. This will allow better conversion of MGM’s vast land-based customer base. FanDuel and DKNG are not in Nevada. 

In February, BetMGM also announced an exclusive partnership with Twitter/X to provide live odds and hopefully customer acquisition. 

Outlook: Inflection in Sight?

Recent results reflect a near perfect storm of regulatory and self-inflicted headwinds. They will persist into 2024–Entain reported (3%) cc PF NGR decline in 1Q24 and BetMGM reported just +2% growth (but +HSD adjusted for unusually low sports margins). Overall, Entain expects another GBP ~40m Online EBITDA headwind in 2024 or ~4% of EBITDA--but by 2H24 Entain will be lapping the worst of the headwinds in the UK and much of Europe, and BetMGM market share could stabilize. Longer-term, underlying market growth is likely +MSD in Europe online and much higher in US and LatAm. At the same time, management is focused on internal improvements. Entain’s revised strategy is focused on organic growth, online margin expansion, and improving the US business. Entain is targeting GBP 70m cost savings by 2025 from a new efficiency program, or ~7% of underlying EBITDA. Longer term, Entain wants to reach >28% margins in 2026 and 30% in 2028 (Online EBITDA ex-US).

BetMGM 2024 revenue is expected to approach $2.5B or ~25% growth, which now looks aggressive, and as mentioned it will be another “investment year.” BetMGM is still targeting 20%+ market share longer term and ~$500M EBITDA in 2026. The former is optimistic but the latter looks more achievable depending on the path of legalization. While the regulatory landscape has been opening up, around 50% of the NA population still does not have legal access to online betting. Access to online casino iGaming is far lower, with legalization in only 6 states. Casino gaming generates ~60% of BetMGM’s TGR, so room for multiplicative expansion is there. Major opportunities such as legalization in California and iGaming legalization in New York have continued to be delayed but still seem like a matter of when, not if. 

Valuation

Entain currently trades at 8x fwd EBITDA, giving no credit for the terminal value of its BetMGM stake. This represents a ~20% discount to its own 5Y average and a much larger discount to Flutter (14x) and DKNG (28x). 

Putting aside BetMGM, this might be close to fair value for a business with +LSD/MSD growth prospects and some industry regulatory uncertainty. Peer Kindred is being acquired at a similar multiple but is less scaled. 

Adding BetMGM, the equation looks very different. 

Around $500M in Adj. EBITDA in 2026 would be achievable via a low DD revenue CAGR over the next 3 years and ~15-20% margins--well below long term targets. 

Assuming a low DD EBITDA multiple to ~$500M in Adj. EBITDA, discounting back 2Y, translates to a value above GBp 300/share for Entain’s 50% stake in BetMGM or ~40%+ of the current share price.

MGM Optionality?

Despite the lack of near-term catalysts from the capital allocation review, an eventual tie-up between MGM and all or part of Entain still seems like a good bet as it has the most industrial logic for both parties. MGM’s acquisition of LeoVegas and entry in the UK are still only very modest steps toward an independent strategy, at best. LeoVegas/MGM still lack an internal sports betting solution, which is a long-term imperative. The Nordic LeoVegas assets would complement Entain’s geography and the MGM UK venture is unlikely to make a dent in an already very mature and increasingly restrictive market. 

MGM CEO Hornbuckle always seems to have left the door open to revisiting Entain longer term, most recently commenting in March 2024, “We obviously follow very closely what's happening with Entain. It's kind of hard to miss. But for now, we're going to stay focused on driving the business that exists today. and ultimately, the other side of BetMGM, which is our LeoVegas business and the rest of world. We'll take it one day at a time.” [emphasis mine]

Catalyst

• Implementation of single game parlay/in-game betting at BetMGM
• Reduction of regulatory headwinds in 2025 and continued legalization in US
• Potential LT merger of some or all assets w/MGM