Analysis: Why DraftKings $22 Billion Bid for Entain Doesn’t Add Up

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DraftKings shook up the gaming world last week with news it had made a $22.5 billion cash and stock offer for Entain.

Entain said its board is carefully considering the offer.

But there are reasons to believe the deal might never be consummated.

What’s in it for MGM?

MGM says it can nix the deal entirely thanks to its contract with Entain for the BetMGM joint venture. The casino giant said its priority is controlling BetMGM. That veto power gives it some interesting leverage.

In fact, Bloomberg reported the company thinks it has enough leverage to gain control of BetMGM without spending gobs of cash. As a result, it is unlikely to make a counteroffer for Entain, or even an offer to buy out BetMGM, Bloomberg said. Instead:

The company is considering other ways to gain control, such as obtaining a majority of the board seats or seeking to take BetMGM public.”

That arrangement could involve licensing technology from a combined DraftKings and Entain.

BetMGM control is key

But where is the benefit for MGM? Why would it allow a rival to gain technological parity, then pay licensing fees to that same rival?

There is a chance MGM is ‘negotiating via the press’ to try to lower the asking price for BetMGM. Owning BetMGM outright is surely the best outcome for the casino operator, as it showed within its earlier rejected Entain bid of roughly $10 billion.

As Truist analyst Barry Jonas said in a note:

We think it makes more sense for [MGM] to just buy Entain’s 50% share of BetMGM. MGM owning all of its online business would be a clear long-term positive in our view, though price would obviously be an important factor.”

What is BetMGM worth?

Bank of America said it was “tough to value” BetMGM but pegged it between $3 billion-$6.6 billion for half the company. 

That is well within MGM’s grasp, with more than $11 billion in cash on hand.

One potential factor here. MGM says it has veto power, but the language of the contract is not entirely known. As Fox and FanDuel have shown, companies can interpret contracts differently.

What’s in it for Entain shareholders?

They would get around $4.5 billion in cash and $18 billion in stock in the combined DraftKings-Entain business. But that stock could be under pressure.

It is already down some 8% since the proposal was first announced and could drop farther as DraftKings US pure-play narrative is eroded. There is plenty of room to fall, with DraftKings currently richly valued at ~15x revenues.

Additionally, if they do have to sell off BetMGM to make the deal work, do Entain shareholders want to hitch their wagon to DraftKings rather than BetMGM?

BetMGM said in April it surpassed DraftKings as the second largest operator in the US.

Source: MGM Q2 results presentation

What’s in it for DraftKings?

Does DraftKings want Entain’s global revenues that could turn the combined business profitableThat might be concerning in itself.

As one investor told LSR:

“It feels like DraftKings is admitting the $1.7 billion EBITDA target from its recent investor day is not that easy.”

Or does DraftKings want the Entain technology powering BetMGM?

Jeevan Jeyaratnam, COO at Abelson Odds, said that may be the case given some of the issues with SBTech through the first part of the NFL season.

At one point in the middle of the Week 1 NFL slate, DraftKings had no football product available at all.

Tech upgrade potential

The Entain technology therefore looks like an upgrade, especially with the added expertise in online gaming.

Numis analyst Richard Stuber noted Entain had the “leading cross-product proprietary tech stacks in the industry.”

But again, why would MGM allow a key competitor to improve its technology unless it gets a good deal on BetMGM? That, in turn, might not be great news for DraftKings and Entain shareholders.

There’s also the issue of integrating both Golden Nugget and Entain.

To sum up, it is tough to find an outcome that benefits all three key decision-makers.

Does that mean a deal won’t happen? Well, who ever said the US sports betting market had to make sense?