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Entain - DraftKings acquisition details

Nicholas Hyett, Equity Analyst | 22 September 2021 | A A A
Entain - DraftKings acquisition details

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Entain plc Eur0.01

Sell: 1,723.50 | Buy: 1,725.50 | Change -102.50 (-5.61%)
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Entain has confirmed that it's received two approaches to buy the company from DraftKings. The first at £25.00 a share was rejected. The second mixed cash and shares deal offer values Entain at £28.00 per share, reflecting a 46.2% premium from the group's closing share price on 20 September.

Entain management confirmed they are considering the offer.

The shares rose 8.7% following the announcement

View the latest Entain share price and how to deal

Our view

News about a possible offer from US fantasy sports giant DraftKings sent Entain soaring. The proposal reflects a significant premium and, unlike previous attempts to buy the business, Entain management are considering the offer. But the deal is still far from becoming a reality.

BetMGM, Entain's US joint venture with casino operator MGM, is likely the beacon that attracted DraftKings. 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 money.

However, MGM can effectively veto the deal if it would see Entain become part of a rival US gambling operation, the kind of operation DraftKings already runs. The acquisition could also draw criticism from US regulators as an antitrust issue.

An optimist might argue the deal will push MGM to put in a bid of its own, especially since it already tried to buy Entain back in January. However, we see that as unlikely, both because of difficulties financing such an offer and because MGM already has influence though its ability to weigh in on negotiations as a partner.

Given the risks around the offer completing it's important not to lose sight of Entain's stand-alone investment case.

The past 18 months saw more people at home with nothing to do, which boosted Entain's online gaming businesses like Foxy Bingo, Ladbrokes Casino and partypoker. We've seen double digit growth across all geographies, bar Germany. This is particularly good news because running a website or app is much more profitable than running physical shops.

A return to in-person gambling is undoubtedly positive for Entain, but as online is more profitable, a sizable shift back to bricks-and-mortar could see margins come under pressure. CEO Jette Nygaard-Andersen is optimistic that the group can carry the group's online momentum forward into the post-pandemic world, and we're inclined to agree. Many players have probably shifted online permanently. That's behind the decision to double investment in its gaming studios.

Debt crept slowly upward from the start of the year, owing largely to the group's acquisitions in Portugal and the Baltics. But at 2.2 times cash profits, it's not uncomfortably high and leaves room to squeeze in further acquisition opportunities should they arise.

Greater scale should drive improved efficiency and while regulatory scrutiny remains high, Entain's geographically diverse footprint (50% of revenues are generated outside the UK) helps mitigate the risk to some extent. The group's also taken steps to boost its ESG credentials, with increased focus on responsible gambling, and a shift to regulated markets that provide a greater degree of regulatory certainty.

We're mindful that easier comparisons added wind to its sales, but the latest set of results suggest Entain's core business is strong and its growth prospects remain attractive.

However, all that takes a backseat to a possible takeover. While we acknowledge that the offer in itself is a vote of confidence in Entain's potential, we're conscious that there are still hurdles to clear. If the deal doesn't materialise there's not much else underpinning the recent run-up.

Entain key facts

  • Price/Earnings ratio: 28.4
  • 10 year Average Price/Earnings ratio 11.7
  • Prospective dividend yield (next 12 months): 1.6%

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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Half Year Results (12/08/2021)

Net gaming revenue (NGR) rose 11% at constant currency to £1.8bn, as strong growth in online gaming offset weakness in retail, due to Covid-related shop closures.

Underlying profits fell 12% to £205.6m, as a good result in the core business was offset by a £78.2m loss related to Entain's stake in BetMGM. Underlying cash profits rose 12% to £401.5m, with guidance for the full year unchanged at between £850m and £900m. The board did not propose an interim dividend, but expects to be in a position to start paying dividends again in March 2022 assuming pandemic related restrictions continue to ease.

Online NGR rose 27% to £1.6bn, including a 2 percentage point boost from the Bet.pt and Enlabs acquisitions. Revenue growth coupled with lower marketing costs helped offset a 14% increase in operating costs, due in part to acquisitions. This meant underlying cash profits rose 35% to £495.9m.

Online sports betting rose 52%, reflecting a lack of sporting events last year. Win margins were up 0.3%, reflecting an increase in recreational betting and an improved product mix. Online Gaming faced tough comparisons as retail closures shifted business online last year, but still posted 11% growth.

Covid-related disruption meant Retail NGR was down 46%. This translated into an underlying loss of £62.7m, compared to cash profits of £15.5m last year. All estates are now open and volumes are starting to recover.

BetMGM, the group's joint venture in the US with MGM Resorts, reported NGR of $357m, reflecting a strong second quarter performance. It commands 22% of the sports betting and iGaming market in the US and operates in 13 states. This is expected to increase to 20 over the next year. As previously announced, total investment in the platform is expected to be roughly $660m by the end of 2021.

The group had a free cash outflow of £255.6m, compared to an inflow of £216.1m last year. Acquisitions, unfavourable working capital movements and an increase in taxes fed into the decline. Excluding the impact of acquisitions and investment in BetMGM, free cashflow was £197.7m.

The acquisitions and BetMGM investment also meant net debt came in at £2bn or 2.2 times cash profits, up from £1.8bn at the start of the year.

The group announced a new efficiency programme dubbed Evlolve which is expected to deliver cost savings worth £100m from 2023 onwards.

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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.