DraftKings’ $ 20 billion takeover offer could be complicated
The online gambling market in the United States has exploded over the past two years as states have opened up online betting and dozens of companies have joined the market. DraftKings (NASDAQ: DKNG) is clearly the biggest name in the industry and of great growth value for investors, but it does not have a firm grip on the US market, and other players like MGM Resorts (NYSE: MGM) and Rush Street Interactive (NYSE: RSI) grow rapidly.
In a surprising move on Tuesday, it was reported that DraftKings had made a $ 20 billion offer to acquire Entain (LSE: ENT), a UK-based online gambling company, an offer that has since been confirmed. In the United States, Entain is known to have a 50/50 partnership with MGM Resorts called BetMGM, which is the US sports betting and online gaming arm of the two companies – and it is this strength that sets up a battle. high stakes for the future of online gaming.
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Table stakes
The acquisition of Entain could be an attractive way for DraftKings to expand internationally, given Entain’s licenses in 27 countries on five continents. And it could be a way to merge operations with one of the other major online gaming companies, creating a global gaming juggernaut. But it can be complicated to strike a deal given Entain’s ties to the states. -United.
Here’s what MGM says its BetMGM partnership with Entain involves:
[MGM Resorts] has provided BetMGM with exclusive access to all of our domestic land and online sports betting, major poker tournaments and online gaming operations and Entain has provided BetMGM with exclusive access to its technology in the United States.
So this is a broad deal with both companies bringing something significant to the table, including cash to fund BetMGM operations. The partnership requires the agreement of both companies to make significant changes.
… we share control of BetMGM with Entain with all major operating, investing and financial activities requiring the consent of both members.
MGM has already confirmed that it would indeed have to agree to any deal. And this is where things get complicated.
How the DraftKings, Entain and MGM Resorts relationship could play out
Given the relationship Entain and MGM Resorts already have, it’s likely that a major deal will be needed if a deal is to go through. Here are three ways that could play out given what we know today:
- MGM allows DraftKings to acquire Entain: In this scenario, BetMGM would continue to operate and MGM would be half-owner of the operation with DraftKings. But with DraftKings running its own business and owning half of BetMGM, this could make it extremely difficult for BetMGM to grow. DraftKings could withhold additional funding for growth (which requires the consent of both parties and is usually shared by owners), or it could keep the technology under DraftKings, thereby limiting the value Entain brings to the project. The idea would be to bring out MGM for the benefit of DraftKings. I see this as unlikely because MGM would not agree to be in business with its biggest online gaming competitor.
- MGM acquires BetMGM: Another option would be for MGM to simply buy out the other half of BetMGM. This would allow DraftKings to acquire the non-US operations of Entain and leave the US operations to MGM. This appears to be a viable option, especially given DraftKings’ already large market share in the US and the potential need for cash to pay Entain on a buyout. MGM could effectively help fund the Entain deal while benefiting from the 100% ownership of BetMGM. Casino companies often buy, sell and trade assets to fund or get regulatory approval for acquisitions, which could be the case here too.
- DraftKings acquires MGM: The last option is DraftKings to pay MGM the half of the BetMGM it owns. MGM would get a big check, or maybe shares in DraftKings, while DraftKings would take a big lead in market share in the United States.
- MGM outbid on DraftKings: If MGM Resorts is still interested in Entain, it could try to beat DraftKings’ offer. I don’t think that’s likely, as it would actually be a merger of companies of equal size, which MGM might not agree to.
Other options could emerge, but MGM Resorts has a powerful hand here with its partnership with Entain. And he could play this hand aggressively.
The acquisition of DraftKings could be an opportunity for MGM
If DraftKings and Entain come to an agreement, I think the most likely scenario is that MGM Resorts will buy half of BetMGM that it doesn’t already own. The company had $ 5.6 billion in cash at the end of the second quarter of 2021 and $ 9.9 billion in cash, so it has the funds to strike a deal.
We also know that MGM Resorts attempted to buy Entain itself earlier this year, for around $ 11 billion. He could now buy the crown jewel he really wanted in the other half of BetMGM for a fraction of that price, depending on how desperate DraftKings was to acquire Entain.
DraftKings clearly strives to be the leader in the online gambling industry in the world, and that makes sense since it is the sole activity of the company. For MGM Resorts, DraftKings’ aggressive acquisition strategy could be an opportunity to purchase a key online gaming asset at an attractive price. Time will tell if this deal has legs or if it crumbles like others before.
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