Over the weekend, news came out that MGM Resorts International had made an informal offer to take over its joint venture partner, Entain (formerly GVC). The latter had rebuffed the overture.
MGM and Entain make up the two halves of BetMGM, that brand having supplanted Roar Digital as the official name of the joint venture. MGM supplies the brand, customer database and market access through its brick and mortar properties. Entain supplies the technology and online expertise.
Because the story produced so much buzz, MGM was forced to address the subject more directly. Securities laws being what they are, however, there’s a limit to how much either company can say. Disclosing a “firm intention” to make an offer would put both companies on the clock to either settle on a deal or abandon the possibility.
What we do know about MGM’s intentions
As a result, MGM’s press release spends nearly as many words emphasizing the lack of certainty as it does clarifying anything. What is now on the official record is as follows:
- MGM informally proposed a takeover in which Entain shareholders would each receive 0.6 shares of the new company.
- At the time of the offer, that math would value Entain at around $11 billion. That’s a markup of 22% over its trading value at the time.
- Former Entain shareholders would wind up owning 41.5% of the resulting company.
- IAC, an investment company which owns 12% of MGM, supported the offer and was willing to provide some funding if Entain’s shareholders wanted some cash in lieu of an all-shares tie-up.
- Entain’s Board of Directors rejected the idea. They stated that $11 billion undervalues the company’s future prospects, and furthermore that they don’t see the strategic rationale for fully combining the two companies.
The press release concludes by making it clear that the company has nothing more to say on the topic until such time as it’s ready to make a formal offer.
So what is the strategic rationale?
It’s not very surprising that MGM and Entain would disagree on what the latter is worth. Entain is a firm believer in its own value, and MGM would like to get a good deal. That goes double for IAC, which is specifically in the business of bargain hunting.
However, that’s a matter for the negotiation table. The bigger barrier is Entain’s belief that a full tie-up is a bad idea. MGM does attempt to provide some of its rationale in the press release, but in vague terms. To paraphrase concisely:
- Consolidate control over US online operations under a single roof.
- Acquire a full, end-to-end technology stack.
- Expand and diversify its core business.
- Become a global company, positioned for further growth.
The first point is really the crux of things. Joint ventures are inherently fragile, as the two parent companies are still in some sense competitors. Over time, conflict is inevitable, with the result that they usually end one of a few ways.
The positive outcomes are that the companies merge, that one acquires full control over the venture from the other, or that the two spin off the joint venture as an independent company. The bad alternative, if they cannot come to terms, is that things eventually wind up in the courts.
How serious are MGM’s international ambitions?
Much has been made of the second point. MGM would like to have full control of the technology, from end to end. This is undoubtedly true, but it’s not the whole story.
The reason so much focus has been placed there is, perhaps, because of DraftKings‘ popularity with investors. The company itself as well as market analysts have made a lot of the fact that it no longer reliant on third party suppliers since it merged with SBTech at the same time it went public.
Yet if the primary objective were for BetMGM to have its own tech stack, that could be achieved by way of a spinoff. The fact that MGM is pressuring Entain to merge suggests that it does in fact have larger ambitions. It hinted at these in hand-waving fashion with the latter two points.
It was barely a decade ago, in 2010, that the company changed its name from MGM Mirage to MGM Resorts International. So far, those international ambitions have been limited to Asia, with resorts in Cotai and Macau. It is working with the Japanese government for permission to build an integrated resort there as well.
The company hasn’t said anything about plans for Europe, South America or anywhere else. However, if the possibility of building resorts in other parts of the world is on its radar, then that would explain its fixation with a full acquisition of Entain. The latter’s online products – perhaps rebranded as BetMGM – and customer databases could go a long way towards making such a venture successful.
What will happen next?
Though Entain has been dismissive of MGM’s overtures so far, this issue won’t just disappear. As mentioned, joint ventures are rarely a permanent arrangement.
The next step, presumably, will be further talks behind closed doors. This will presumably be influenced by how things go with the launch of the BetMGM Online Casino in West Virginia, Pennsylvania and Michigan. To date, the evaluation of the joint venture has been based mostly on its performance in New Jersey
Of course, even if Entain comes around on the strategic aspects, it’s possible that the companies won’t be able to see eye to eye on an appropriate valuation. In that case, a spinoff is still possible.
Finally, it is possible that the current situation persists for some time. The joint venture won’t last forever, but there’s little enough overlap between the remainder of the two companies business that conflict can be minimized. That’s especially true if Entain forgoes any expansion of its own Partypoker/Party Casino brand outside of New Jersey.
Even under that scenario, this discussion will come up again periodically until the companies reach some other arrangement. The next time we hear about it, it could be a formal deal or just more rumors. Either way, though, it’s a safe bet that we’ll hear more about this story before the year is out.