Entain Shareholders Not Keen on STS Purchase

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European corporation Entain, owner of Ladbrokes and joint operator of US online giant BetMGM, recently announced a new multimillion acquisition. But many shareholders were not happy with the move.

The company dropped $957 million to buy Poland-based European sportsbook brand STS last week. Shortly afterwards, Entain’s share price dropped by 10.5% in one day.

Now, the investor group Eminence Capital, owner of 2.1% of shares in Entain, has sent an open letter to the Board of Directors criticizing the STS deal.

The letter pulled no punches. “The market reaction to this equity offering should be a wake-up call to Entain’s tone deaf Board and management team,” Eminence CEO Ricky Sandler wrote.  

Eminence’s letter also encouraged Entain to return focus to one of its “very valuable assets”. Namely, the 50% stake it has in BetMGM. BetMGM has shown a very strong year so far, posting 94% year-on-year growth in the first quarter of 2023.

MGM Resorts International has flirted with buying Entain several times in the past few years. But a figure that suits both parties has never been reached.

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Part of the STS acquisition that has Eminence worried, and that knocked off almost $200 per share on Entain’s value at the London Stock Exchange, is the company equity Entain offered to finance the purchase.

Entain issued some $760 million in shares to help fund the STS deal. That’s around 8% of its entire market capitalization.

“This approach is perplexing on many levels,” said the letter from Eminence Capital. “While we can support the Company pursuing seemingly rational acquisitions, funding them with highly undervalued equity is an empire building, shareholder value destroying strategy.”

Eminence then pointed out that Entain has previously told MGM Resorts International that its bids undervalued the company. However, the shares issued to fund the STS purchase are actually valued at a lower price per share than MGM offered in 2021.

“Issuing Entain stock at ~7x EBITDA (excluding the value of the BetMGM JV) to buy an asset at ~12x EBITDA is value destructive to shareholders, even with incredible synergies,” the letter said.

Fast Growing Regions

Although the financing of the deal may have worried Eminence, some analysts did see the value in STS.

“Strategically, the deal makes sense, it continues the expansion into fast-growing regions and leverages many of Entain’s existing capabilities,” Hargreaves Lansdown equity analyst Matt Britzman told Reuters.

STS is the largest gambling operator based in Poland. They have licenses across the European Union’s markets, including in the UK, and operate 440 betting shops with a €750 million annual turnover.

STS also has a good relationship with Polish regulators, so should the country ever fully legalize online casinos, it will be in prime position to take advantage.

Entain said in the official announcement of the deal that the “acquisition is expected to be earnings accretive in the first full year of ownership.”

Eminence Capital, however, was not convinced.

“While calling this deal “accretive” on an EPS basis may be technically correct, it demonstrates that management either doesn’t understand finance, or worse, that they believe the Company’s shareholders are naïve,” the open letter said.

Eminence bosses were not confident in the future of Entain. It could potentially use its shareholder voice to recommend Entain sells up should MGM come back again with another offer.

“As shareholders lose confidence in Entain’s ability to allocate capital and create long term value, it is quite likely they will support a sale of the company to MGM at a materially lower price than previously assumed,” the letter said.

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