Why Entain Rejected $11 Billion Takeover Bid From Sports Betting Partner MGM

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London-listed gambling firm Entain has turned down an initial $11 billion takeover bid from MGM Resorts, its JV partner in BetMGM sports betting.

The Wall Street Journal first reported an offer on Sunday, which Entain (formerly GVC) confirmed this morning.

The UK operator said it rejected MGM’s last bid of 1,383 pence per share – a 22% premium to Entain’s share price and a total value of $11 billion.

Details of the Entain bid

The deal would be funded chiefly in MGM stock, meaning Entain shareholders would ultimately own 41.5% of the enlarged group. MGM also offered a “limited partial cash alternative,” Entain said.

However, Entain turned down the offer because it “significantly undervalued” the company and its prospects, according to a company statement:

Entain has informed MGMRI that it believes that the proposal significantly undervalues the Company and its prospects. The Board has also asked MGMRI to provide additional information in respect of the strategic rationale for a combination of the two companies.

Indeed, Entain shares jumped 28% to 1,450p in London this morning. That might suggest investors think a higher bid is on the way.

MGM did not respond to a request for comment

What’s in it for MGM?

The main benefits of a bid would be owning 100% of the upside in BetMGM, as well as the Entain technology that powers it.

BetMGM is currently gaining share in US sports betting and may have the inside track to third place in the market. However, to acquire the technology, MGM would also take on a sprawling global gambling business with operations across the UK, Europe and Latin America.

The company could benefit from valuation arbitrage, as its brings those global revenues to the US public markets.

More like Caesars and William Hill?

Consider: Entain’s EBITDA for the trailing twelve months to June 2020 was $668 million. That equates to an EV/EBITDA multiple of around 16.5x. Meanwhile, DraftKings is currently trading around 40x revenue for the same period.

But MGM might not want to run that global business of brands like Ladbrokes, Coral and Bwin. Instead, it could potentially follow the Caesars/William Hill takeover blueprint. Caesars acquired the entire company and is now trying to offload the non-US parts to another buyer.

MGM stock was relatively unmoved in pre-market trading.