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Entain - Possible offer received, and rejected

Nicholas Hyett, Equity Analyst | 4 January 2021 | A A A
Entain - Possible offer received, and rejected

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Entain plc Eur0.01

Sell: 1,810.00 | Buy: 1,811.00 | Change -24.50 (-1.34%)
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Entain, formerly GVC, has received a proposal from MGM Resorts International (MGMRI) to acquire the entire company for 0.6 MGMRI shares for each Entain share. This would represent a price of 1,383p per Entain share, a 22% premium to the share price before the announcement.

However, the Entain Board believes that the proposal "significantly undervalues the Company and its prospects" and has request "additional information in respect of the strategic rationale for a combination of the two companies".

Further announcements will be made when appropriate. In the meantime the Entain board encourage shareholders to take no action, and there is no certainty than any offer will be made for the company.

Entain shares rose 25.2% in early trading, or 1,419p

View the latest GVC share price and how to deal

Our view

After William Hill received an offer from its US partner Caesar's last year, it's perhaps no surprise that MGM has approached Entain (formerly GVC).

Entain and MGM have been showing some real progress in their US joint venture, BetMGM. Entain estimates the US sports-betting and iGaming market will be worth approximately $20.3bn by 2025. Recent market share gains and the steady increase in the number of states in which the company operates suggest BetMGM could be in-line for a sizeable chunk of that. Given the potential for online betting models to disrupt traditional casino models we can well understand why MGM want the whole pie rather than just a 50% slice.

However, the acquisition of Entain is more complex than the bid for William Hill.

William Hill is essentially a UK bookmaker with a small US business and only recently acquired significant European operations. Buying William Hill and spinning off the UK operations separately is a relatively simple process. Entain is far more complex because it's far more global (with non-UK revenues accounting for almost 50% of the total). While there is clear logic to the acquisition of the US operations, the future of the rest of the business is less clear.

That, together with a relatively modest premium by recent standards, probably explains why the Entain Board has taken a relatively dim view of the proposal. The board have argued it "significantly undervalues" the company and is asking for more detail on the strategic rationale for the deal.

However, even if Entain is right, and the deal does undervalue it, there can be no guarantee that a better offer will appear. Entain shareholders would own 41.5% of the combined group even under the current proposal. Upping the number of MGM shares on offer dramatically, risks moving the deal into reverse takeover territory. Meanwhile a significant amount of debt already on the US group's balance sheet, equal to 4 times cash profits last year, probably places an upper limit on how much cash can be included as a sweetener.

Still this is a nice problem to have. An improved offer can't be ruled out, and at worst it's a clear vote of confidence in the future of the US joint venture.

Putting the deal to one side we think Entain still has fundamental attractions.

A significant high street presence, in the form of Ladbrokes and Coral shops, means Entain has lost out from nationwide lockdowns. But a surge in online gaming, thanks to names like Foxy Bingo and partypoker, as well as the return of major sporting events has offset most of the pain. Combine that with better than expected trading in the US, and full year cash profits are expected to come in about £50m better than feared.

While regulatory scrutiny remains high, a geographically diverse footprint helps mitigate the risk to some extent. The group's also taken steps to boost it's ESG credentials, with increased focus on responsible gambling, and a shift to regulated markets that provide a greater degree of regulatory certainty

However, at the moment the valuation makes us cautious. The shares were trading at PE ratio of 16.4 times, close to an all time high, even before the MGM offer. With no certainty of a higher bid to come, there's potential for a big fall in the short term if a deal doesn't materialise.

GVC key facts

  • Price/Earnings ratio: 16.4
  • 10 year average Price/Earnings ratio: 10.3
  • Prospective dividend yield (next 12 months): 3.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Strategy Update - 12/11/20

GVC said it has continued to see strong trading since the beginning of October, with good results in both sports betting and gaming. This will offset the additional headwind from store closures during England's second lockdown, with guidance unchanged as a result.

The group also announced it would be changing its name to Entain plc.

GVC has made moves to strengthen its ESG (environmental, social and governance) credentials, with an exclusive focus on regulated markets, embedding responsible gambling metrics into bonus conditions and improved corporate governance practices.

The group aims to generate 100% of revenues from regulated markets by the end of 2023. That means exiting markets where there is no viable route to regulation, with 99% of revenues to be from regulated or regulating markets by the end of 2020.

Collectively these actions are expected to reduce cash profits by £40m next year - although this expected to be offset by growth within the business.

GVC has also set out four key growth drivers for the next three to five years. These are;

  • Leadership in the US: where joint venture BetMGM already has an estimated 18% market share in states where it operates
  • Grow in core markets
  • Enter new markets: considering both organic expansion and M&A
  • Expand to new audiences: entering new markets such as eSports and digital gaming, which are evolving new betting markets

Find out more about GVC shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.