(Bloomberg Opinion) -- Gambling has been one of the few areas of online activity where the U.S. doesn’t dominate. Now it’s catching up. The latest attempt comes in the form of an $11 billion bid from MGM Resorts International for the U.K. owner of the Ladbrokes and Coral betting shop chains, Entain Plc. The market wants an even bigger price. That shouldn’t be too hard to get, even if conjuring a rival offer would be complicated.
MGM and Entain already have a partnership giving the U.S. company access to the London-listed group’s technology. For years, regulatory curbs in the U.S. enabled U.K. and Irish firms to steal a march in online betting. Liberalization led to cross-Atlantic alliances. Now MGM wants the simplicity of full control over Entain rather than the fudge of a joint venture. It’s not alone — Caesars Entertainment Inc. just agreed to buy its partner, William Hill Plc, for similar reasons. The near-term cost and revenue synergies from a deal are less clear.
For MGM, there is a big benefit to this starting point. Any rival bidder would have to negotiate new JV terms or risk the loss of the partnership. That limits the number of firms that might be interested in gate-crashing. Buyout shop Apollo Global Management Inc. sniffed around William Hill but later withdrew from the auction.
MGM has other advantages too. First, a strong share price and acquisition currency that’s doubled since July. And second, a deep-pocketed backer in the form of lead shareholder IAC/InterActiveCorp, backed by billionaire media mogul Barry Diller. Small wonder then that its offer is denominated in stock with a “limited partial” cash alternative.
Entain has rejected this and previous approaches. The latest is worth around 8 billion pounds ($11 billion) for the equity at roughly 13.80 pounds per share based on MGM’s closing price. The 22% takeover premium over Entain’s Dec. 31 price isn’t as mean as it looks. It’s about one-third over the U.K. company’s three-month volume-weighted average price, and the stock was already boosted by some bid speculation.
However, the market has pushed Entain’s stock above the proposal and appears to be hoping for an offer worth closer to 15 pounds a share. That would cost MGM nearly 11 billion pounds including assumed net debt, representing almost 13 times Entain’s forecast 2021 Ebitda. At this level, the starting return on invested capital would be a paltry 4% based on the target’s expected 571 million pounds of operating profit in 2021. MGM would have its work cut out to drive those returns higher and the synergies are at this stage uncertain. Still, Caesars shares have rallied on its agreement to pay a similar multiple for William Hill.
A rival bid can’t be ruled out. But if MGM shareholders react the same way as Caesars’ did, the value of the share-based proposal will rise, also making it easier to add a sweetener to secure Entain’s agreement. The risk is the market frets that Entain shareholders would prefer cash. But in that scenario, MGM can at least call on Diller for support. MGM has a strong hand, but it hasn’t played the winning card yet.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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