For one of the greatest performances among sports betting stocks, the US-listed shares of Entain Plc (OTC: GMVHY) have risen by around 38% so far this year. If investors factor in the potential for the gaming company to engage in value-generating transactions, there may be more upside ahead.
James Wheatcroft, an analyst at Jefferies, recently informed clients that although the Coral owner's mergers and acquisitions (MA&) flexibility has grown, the share price has not kept pace. A strong technological stack and renewed profitability stability may make it easier for Entain to assess transactions.
"Entain has built a track record of consistent delivery across recent quarters – we expect investor attention will now re-focus on M&A,” observes Wheatcroft.
In addition to rating the stock as a "buy," he notes that his sum of the parts (SOTP) analysis suggests a 55% upside from the stock's recent trading level. This does not take into consideration the potential for another company to offer to buy Entain as a whole, which would require a premium over the current share price of the potential target.
The revived BetMGM company, which has long been the focus of consolidation rumors, is jointly owned 50/50 by Entain and MGM Resorts International (NYSE: MGM).
In short, it's common knowledge that MGM wants to acquire BetMGM in its whole and that leaving the joint venture would bring in a sizable sum of money for Entain. The Ladbrokes owner's previous leadership teams explicitly said that joint ventures don't endure forever and that management might consider alternatives for its BetMGM investment now that the Entrain ship is stabilizing.
“The heavy presence of activist investors on the Entain share register implies an appetite for value realization,” adds Wheatcroft. “We think investors will therefore increasingly look to a SOTP valuation, with particular focus on BetMGM. A potential stand-alone option derived from a cloned Entain tech stack negates the need to acquire the whole of Entain. The wider range of strategic options for BetMGM value realisation, including a US listing and M&A, should generate valuation tension.”
Eminence Capital founder Ricky Sandler has a seat on the board and Keith Meister’s Corvex Management has a stake in the gaming company. In addition to being a director at MGM, Meister's hedge fund owns stock in the operator.
In a sale or US IPO for Entain, a value-creating deal including BetMGM would probably command the highest amount of capital, but the sportsbook operator has other levers at its disposal to boost shareholder value.
Betr may be considering a bid for Entain Australia, according to recent media reports from Australia, a country where Entain has encountered regulatory obstacles.
“A continued tough market backdrop, isolated tech platform and recent management departures make Australia a possible disposal candidate, in our view. Our SOTP highlights a £660 million ($890.1 million) value for Entain Australia,” concludes Wheatcroft.
