One potentially interesting plotline for 2021 has sputtered out already. MGM Resorts International announced on Tuesday that it would not persist in trying to acquire its joint venture partner, Entain.
The two companies joined forces in 2018 to create the company formerly known as Roar Digital. It has now dropped that name and taken on that of its major product, the BetMGM platform.
Joint ventures are fragile by nature, and generally presumed to be a temporary solution. The usual outcomes are that one partner buys out the other’s share, the two agree to spin off the joint venture as an independent company, or the two parent companies merge. MGM had attempted to orchestrate the latter solution shortly into the new year.
However, Entain turned up its nose at the offer, saying it “significantly undervalued” its future prospects. MGM had informally proposed an all-shares takeover. Entain stockholders would receive 0.6 shares of the new company for each share of Entain.
This implied a value of $11 billion for Entain, a premium of 22% over its trading value at the time. However, Entain’s board felt this wasn’t enough.
Unable to get on the same page
The whole situation has been somewhat embarrassing for MGM. What it intended to be a private precursor to formal negotiations ended up as a public rejection instead.
If the implied valuation of Entain had been the only issue, the two companies might have been able to arrive at a mutually agreeable deal. However, Entain also indicated that its major stakeholders don’t see the strategic point of such a deal. Except for the specific niche covered by BetMGM, the two companies don’t have significant overlap at the moment. MGM does have ambitions outside the US, but it appears Entain does not see their global plans as being in alignment.
Just after the news broke, MGM released a statement in which it said it expected to continue negotiations and believed it could provide strategic justification for the deal. Major MGM shareholder IAC even offered to put up $1 billion of its own money to help things along. It seems, however, that Entain was not interested in having that conversation.
“After careful consideration and having reflected on the limited recent engagements between the respective companies, [MGM] does not intend to submit a revised proposal and it will not make a firm offer for Entain,” the company explained in Tuesday’s press release.
Reading between the lines and taking the developments as a whole, the impression one gets is that MGM Resorts believed there was a tacit understanding that the joint venture would ultimately lead to a merger. If so, Entain has been operating on different assumptions.
What does Entain have planned?
The question, then, is what Entain’s long-term plans are for BetMGM, if it is strategically opposed to a merger. Given the branding and tie-ins with MGM’s physical properties in the US, it’s unlikely Entain hopes to take full ownership of the joint venture itself. Rather, it is presumably looking for a spin-off, or to sell only its stake in the joint venture to MGM.
Ironically, Entain has just had its own plans rebuffed by another company. Even as MGM was making its overtures, Entain was extending a more formal offer to Swedish gaming and media company Enlabs.
Entain’s offer was a cash purchase, rather than a tie-up, with Enlabs shareholders to receive SEK 40 (roughly $4.80) per share. Enlabs’ Independent Bid Committee was in favor of the deal and recommended it to shareholders. However, a group of shareholders with a collective 10.7% stake in Enlabs elected to block the deal, asking for SEK 55 instead.
This decision was spearheaded by Alta Fox Capital Management LLC, which holds over 3.3% of the shares itself. It claims that the circumstances of the deal are suspicious. It also accused Enlabs Chairman Niklas Braathen of recommending a bad deal because of personal compensation he would receive.
Given the size difference of the companies, that deal falling through may not impact Entain’s plans to the same extent as its rejection of MGM. Even so, both have experienced a false start to begin the year. They will have to go back to the drawing board and rethink their plans a bit.
In the meantime, BetMGM will be among the first operators to launch in Michigan on Friday. How that goes will play a big role in determining the joint venture’s position in the overall US market, and both companies’ plans going forward.