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Introduction
Entain (OTCPK:GMVHF) is a British company and operates in the sports betting industry. The company is favored by many of its competitors, as DraftKings offered to acquire Entain in 2021 and more recently MGM also expressed interest in acquiring Entain or its North American operations. Entain is an acquisition opportunity, but because the growth and valuation of the stock are favorable, I prefer to see the stock trading on the stock market instead of being acquired.
The stock’s total return is strong, averaging 19% per year over the past 10 years. The stock is traded on the London Stock Exchange (LSE), but ADRs are also available on the exchange. Since the liquidity of ADRs is low, buying shares on the LSE is preferable.
MGM Resorts Looking To Acquire Entain
A recent article described that MGM is looking to acquire Entain or its North American operations. Entain is favored by other sports betting companies, as DraftKings offered in September 2021 to take over the company in a cash and stock offer. DraftKings is one of the top three players in online sports betting, and with BetMGM also a strong player with 25% market share, the combined company could be a strong leader in the sports betting space. MGM also offered to acquire the company in January 2021. Both occasions Entain rejected the proposals and prefers to grow independently.
Entain and MGM Resorts entered a joint venture for BetMGM, one of the three largest players in iGaming and sports betting in North America. The second attempt to acquire Entain increases the likelihood that the takeover discussion will be more favorable. MGM earlier this year showed interest in online gaming outside the U.S. through its acquisition of Leovegas. The combined company would fit well with a strong international sports betting presence.
Third Quarter Earnings
Third quarter results (Entain investor relations website)
Entain saw its net gaming revenue (NGR) rise 2% year-on-year in the third quarter. The retail segment grew strongly with 10% NGR growth year-on-year. Although online sports betting revenues fell 5% in the first nine months compared to the first nine months of 2021, the company is back on track for growth as NGR for online betting increased 1% in the third quarter.
In recent years, the company increased market share after acquiring Ladbrokes in 2018. Revenue grew 5.6% from 2019 to 2021, and the company increased its free cash flow during the corona crisis. Free cash flow margin is strong at 12%.
Entain financial results (Annual reports and author’s own graphical representation)
Dividends And Share Repurchases
Entain is a strong growth player. Due to acquisitions, free cash flow increased 41% annually on average from 2017 to 2021. While the company paid a good dividend until 2019, the dividend has gradually declined since then. Currently, the company does not pay a dividend or buy back shares; it invests to grow its international presence.
Entain’s cash flow highlights (Annual reports and author’s own calculations)
Stock’s Valuation
Looking at the valuation of the stock, we see that the PE ratio is quite high, but this is not a good measure because net income fluctuates widely over the years. Free cash flow is growing steadily, so price to free cash flow is preferable to the PE ratio.
The chart shows that the price to free cash flow ratio is currently 12.5, below the three-year average of 17.8. The price to free cash flow ratio of 12.5 also compares favorably with the industry average.
Investors should keep in mind that investing in a sports betting business is quite risky. Sports betting is an industry that is very profitable in boom years but also has bad years in times of economic turmoil. With the Fed raising interest rates to 5% and inflation extremely high, we see an economic recession looming. Consumers could have other financial priorities than sports betting, which could affect revenues for the coming years.
Risks aside, the company is still growing strongly. And the acquisition opportunity is a growth catalyst for the stock. The valuation is favorable, and I prefer to see the company remain on the stock market, so that investors will benefit greatly as the company continues to grow. The stock is worth buying at these favorable price levels.
Conclusion
The British company Entain operates in the sports betting sector. Its business unit BetMGM (which is 50% owned by MGM) has a large 25% market share in North America. Entain is favored by many competitors, as in 2021 DraftKings offered to acquire the company. MGM also made an offer that year. Entain rejected both proposals. Now, MGM has made a second attempt to acquire Entain. If the deal goes through, the combined company will have a strong international presence in the sports betting space.
In the third quarter, net gaming revenues grew 2% year over year and the retail segment grew strongly at 10% year over year. Online sports betting revenues declined in the first nine months but are growing again in the third quarter.
Free cash flow margin of 12% is high, and price to free cash flow is favorable at 12.5. The 3-year average of price to free cash flow is 17.8. If the stock moves toward the average, investors could profit well.
Investors should keep in mind that investing in a sports betting company is risky because the company may see profitability decline during an economic downturn. The economic outlook is bleak, and this poses a major risk to further growth of the company. In addition to these risks, the stock is worth buying because MGM has expressed interest in acquiring the company, the favorable stock valuation and growth rates are still intact. The stock is traded on the London Stock Exchange with high liquidity.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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