Entain (LSE: ENT) saw its share price rise by as much as 25% on Monday after the sports-betting and gaming group reported a takeover approach.
FTSE 100 firm Entain — which was known as GVC Holdings until December — says its US partner MGM Resorts International has made a possible offer which would value Entain shares at 1,383p. That’s 22% above its closing share price at the end of last week.
However, Entain’s management said the proposal “significantly undervalues” the business. They’re in talks with MGM bosses to see if they can hammer out a deal. Entain also said shareholders should “take no action.”
But what would a deal between the two firms mean for the company’s UK investors? I’ve been taking a look.
How would the MGM bid work?
The proposed takeover by MGM Resorts would see Entain shareholders receive 0.6 MGM shares for each of their Entain shares. As a result, Entain shareholders would own around 41% of the enlarged MGM Resorts business.
We don’t yet know if Entain’s major shareholders would support this deal. Accepting a bid from MGM Resorts would mean becoming a part-owner of MGM’s estate of bricks-and-mortar casino resorts in Las Vegas and elsewhere.
These big resorts are normally profitable but can suffer during recessions. 2020 was particularly bad, of course. Broker forecasts suggest MGM Resorts business will report a $1.1bn loss for 2020 and a $0.9bn loss in 2021.
Entain share price: a strong performer in 2020
Entain owns UK high street bookies Ladbrokes, plus a sizeable portfolio of gaming businesses, many of which operate online. Well-known brands include Coral, Sportingbet, Foxy Bingo and PartyCasino. The company is also active in the fast-expanding US sports-betting market, through a partnership with MGM.
The high street closures caused by the UK’s coronavirus lockdown hit Entain’s profits last year. November’s lockdown alone was expected to reduce EBITDA (earnings before various deductions) by £37m. However, strong online trading appears to have minimised the impact of high street store closures and Entain reported EBITDA of £348.6m for the first half of 2020.
Investors have supported the group’s online focus and US growth hopes. Even before today’s takeover news, Entain shares were up 25% over the last year.
Why is the US market so important?
Back in August, Entain’s newish CEO Shay Segev said he was “determined” to focus on “our technology-enabled priorities.” One of these priorities is “leading the US market.” The attraction is clear — the US market for sports betting and online gaming has only recently opened up. But it’s potentially many times larger than the UK or most other countries.
Entain’s main hope for US domination is its joint venture with MGM, known as BetMGM. The two companies have already invested $450m in this new venture in the hope of becoming the market leader in the US.
Does it make sense to combine Entain’s tech-focused business with MGM Resorts’ US-based operations? Entain shareholders will need to decide for themselves if MGM makes a firm offer.
At the time of writing, Entain shares are trading at 1,439p, above the reported 1,383p value of MGM’s bid. This suggests the market expects the US group to increase its offer.
Under UK takeover rules, MGM must decide whether to bid by 1 February. Entain has promised further updates when possible. Watch this space…
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.