The online gambling market in the U.S. has exploded over the past two years as states have opened up online betting and dozens of companies have joined the market. DraftKings (DKNG +1.35%) is clearly the biggest name in the industry and a great growth stock for investors, but it doesn't have a firm grip on the U.S. market, and other players like MGM Resorts (MGM 0.95%) and Rush Street Interactive (RSI +3.06%) are growing quickly.
In a surprising move on Tuesday, it was reported that DraftKings had made a $20 billion offer to acquire Entain (ENT +2.50%), a U.K.-based online gambling company, an offer that has since been confirmed. In the U.S., Entain is known for having a 50/50 partnership with MGM Resorts called BetMGM, which is the U.S. sports betting and online gambling arm of the two companies -- and it's that asset that sets up a high-stakes battle for the future of online gambling.
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Table stakes
The acquisition of Entain could be an interesting way for DraftKings to expand internationally, given Entain's licenses in 27 countries on five continents. And it could be a way to merge operations with one of the other leading online gambling companies, effectively building a global gambling juggernaut. But it may be complicated to get a deal done given Entain's U.S. ties.
Here's what MGM says that its BetMGM partnership with Entain involves:
[MGM Resorts] provided BetMGM with exclusive access to all of our domestic land-based and online sports betting, major tournament poker, and online gaming operations and Entain provided BetMGM with exclusive access to its technology in the United States.
So this is a broad agreement with both companies bringing something meaningful to the table, including cash to fund BetMGM's operations. The partnership requires the consent of both companies to make any major changes.
...we share control of BetMGM with Entain with all major operating, investing and financial activities requiring the consent of both members.
MGM has already confirmed that it indeed would need to consent to any deal. And here's where things get complicated.
How the DraftKings, Entain, and MGM Resorts relationship could play out
Given the relationship Entain and MGM Resorts already have, it's likely there will need to be some major agreement if any deal is to take place. Here are three ways this could play out given what we know today:
- MGM lets DraftKings acquire Entain: Under this scenario, BetMGM would continue to operate and MGM would be half owner of the operation with DraftKings. But with DraftKings operating its own business and owning half of BetMGM, it could make it extremely difficult to grow BetMGM. DraftKings could withhold additional funding for growth (which needs consent by both parties and is typically shared by the owners), or it could keep technology under DraftKings, effectively kneecapping the value Entain brought to the project. The idea would be to squeeze MGM out to the benefit of DraftKings. I see this as unlikely because MGM wouldn't consent to being in business with its biggest online gambling competitor.
- MGM buys out BetMGM: Another option would be for MGM to simply buy out the other half of BetMGM. This would allow DraftKings to acquire the non-U.S. operations of Entain and leave the U.S. business to MGM. This seems like a viable option, especially given DraftKings' already-large market share in the U.S. and potential need for cash to pay Entain in a buyout. MGM could effectively help fund the Entain deal while getting the benefit of owning 100% of BetMGM. Casino companies often buy, sell, and trade assets to fund or get regulatory approval for acquisitions, so that could be the case here too.
- DraftKings buys out MGM: The final option is DraftKings paying MGM for the half of BetMGM that it owns. MGM would get a big check, or maybe stock in DraftKings, while DraftKings would take a clear lead in market share in the U.S. Given the cash and stock that would need to go to Entain in a buyout already, I see this as fairly unlikely.
- MGM outbids DraftKings: If MGM Resorts is still interested in Entain, it could try to beat DraftKings' offer. I don't see this as likely, because it would be effectively a merger of equally sized companies, which MGM may not agree to.
Other options could emerge, but MGM Resorts has a powerful hand here with its partnership with Entain. And it could play that hand aggressively.
DraftKings' acquisition could be MGM's opportunity
If DraftKings and Entain come to an agreement, I think the most likely scenario is that MGM Resorts buys the half of BetMGM that it doesn't already own. The company had $5.6 billion in cash at the end of the second quarter of 2021 and $9.9 billion in liquidity, so it has the funds to make a deal happen.
We also know that MGM Resorts made an attempt to buy Entain itself earlier this year, reportedly for around $11 billion. It could now buy the crown jewel it really wanted in the other half of BetMGM for a fraction of that price, depending on how desperate DraftKings is to acquire Entain.
DraftKings is clearly making a play to be the industry leader in online gambling around the world, and that makes sense since it's the company's only business. For MGM Resorts, DraftKings' aggressive acquisition strategy could be an opportunity to buy a key online gambling asset at an attractive price. Time will tell if this deal has legs or it falls apart like others before.
