Is DraftKings bid for Entain doomed to failure?

MGM Resorts’ show of strength raises numerous possibilities but DraftKings’ acquisition of SBTech highlights numerous issues.

DraftKings’ offer for Entain came as a surprise but hardly a shock. The US market is driving consolidation of an industry that was already consolidating fairly quickly. At this rate, there will not be many large independent European betting and gaming companies. They will all be swallowed up by the US megacorps as they acquire the technology and expertise needed to catch up with 20 years of sports betting and iGaming technological advancement.

DraftKings is possibly the most ambitious of US companies working in the betting and gambling sphere. It is fast becoming the most audacious and it is almost certainly the best backed (for now).

Lest we forget (after all, it is easy to become lost in the helter skelter of deals), the $22bn offer for Entain… just let that sink in for a moment... twenty-two billion dollars… comes just one month after DraftKings agreed to spend $1.6bn on the acquisition of Golden Nugget Online Gaming (GNOG).

While the numbers are eye-watering, Goodbody analyst Gavin Kelleher points out that DraftKings’ is printing paper to fund its acquisition spree. The proposal for Entain consists of just £6.30 cash and £21.70 in DraftKings’ equity.

“The problem is that some Entain shareholders may not be able to own US equity such as DraftKings, so they are automatic sellers,” says Kelleher.

The other issue is that DraftKings chief executive officer Jason Robbins holds around 90 per cent of the company voting rights. He can do almost anything he likes with minimal interference from his shareholders. So, even if UK shareholders can hold onto DraftKings’ stock, they will have very little influence.

Entain has said it will carefully consider the bid. As well it might. It more than doubles the $8.1bn that US joint venture partner MGM Resorts offered back in January. That was summarily rejected by Entain as undervaluing the business, (which turned out to be a good call) and MGM withdrew from the fray. However, analysts always presumed that it would return at a later date.

In its statement on the DraftKings proposal, MGM made it very clear that it holds the key to the future of Entain. There is a clause in its BetMGM joint venture agreement with Entain that gives it consent over any transaction with a competing business in the US.

Senior analyst Harry Barnick of primary research firm Third Bridge says MGM has three options: buy the joint venture; merge with DraftKings and acquire Entain; or put together its own bid for Entain.

Just last week MGM chief executive officer William Hornbuckle told investors that the company would like to own more than the 50 per cent it holds in the JV. It reiterated that position yesterday and added: “MGM will engage with Entain and DraftKings, as appropriate, to find a solution to the exclusivity arrangements which meets all parties' objectives.”

The first option - buying out the BetMGM joint venture - is much trickier than it sounds. How do you separate the technology? Does MGM really want to get into a relationship with DraftKings, where it relies on one of its biggest competitors to supply its sports betting and iGaming technology? That seems doubtful to this observer, at least.

Barnick disagrees: “If you have access to the best technology… as long as you can strike the right terms, what’s the problem?”

In an earnings call just last week, MGM chief executive officer William Hornbuckle admitted that it was a mistake to hand former Entain (then GVC) CEO Kenny Alexander 50 per cent of the joint venture.

“We critique ourselves for giving up 50 per cent of the business,” said Hornbuckle in a call with investors. “The reality is we're number two in the marketplace today. When you add it all up, we are [there], because we got there so quickly. And so as much as we bang ourselves in the head ‘why did we give away half of our business’, the reason we did is so that we could be in these markets, and it's clearly been proven that first to market has won... We love the business. And so yes, we would like more of it.”

But in Hornbuckle’s head last week, the price for having more of it would not have included getting into bed with DraftKings.

The possibility of DraftKings selling the US JV also raises the question of where does this leave DraftKings? Answer: with Entain’s non-US operations. That’s the equivalent of William Hill’s non-US operations that Caesars has just disposed of to 888. DraftKings might have a more internationalist outlook than Caesars but it was not the driving force behind this offer.

A three-way merger raises similar issues. Does MGM want to give up control to DraftKings? It might at the right price. However, it might also want to consider DraftKings’ track record with acquisitions.

Its acquisition of SBTech has been little short of a disaster. It has been plagued by revelations, investigations and lawsuits. Should a company that is being investigated by the US Securities and Exchange Commission (SEC) really be issuing paper like it is free money as it prepares for its biggest transaction yet?

Perhaps the most likely scenario is that DraftKings flushes out an increased offer from MGM for Entain. The company has bolstered its balance sheet with the sale of its stake in properties since January but a competitive bid would still be a huge leap. If Hornbuckle and his counsel feel confident they can veto the DraftKings bid, then it is a leap they might not need to make.

DraftKings needs this more than MGM. It needs to find a way towards profitability. Its acquisition of SBTech failed to provide it with the platform to dominate the US sports betting and iGaming market. It has one of the strongest sports betting brands in the country but it has not been able to convert its numerous sports betting customers to the more lucrative iGaming space. The acquisition of GNOG is an admission of this failure and the Entain bid confirms it.

Hornbuckle knows it too. As he pointed out to investors last week: “The trick to that business is iGaming in terms of the long-term economics, Sports betting is compelling at scale. It's brand driven... We're competing like hell to get [market] share, and that's all fine and good, but where the money ultimately will be  - not ultimately, where the money even is today with only five iGaming states -  is in iGaming.”

MGM knows it. DraftKings knows it. MGM appears to hold the cards but you can expect DraftKings to test that.