MGM Resorts International will not make a second attempt to acquire its joint venture partner Entain. CEO Bill Hornbuckle firmly denied such rumors during MGM’s Q4 2022 earnings call with investors. That means that the two companies’ shared ownership of the BetMGM online gambling brand will continue for the foreseeable future.
It was analyst Shaun Kelley of Bank of America Merrill Lynch who raised the possibility during the call’s question and answer period. However, he took a roundabout way of asking:
So the question we get all the time remains […] that ownership interest in upping the stake in [BetMGM]. And obviously, we know there’s a partner there, but if you could give us your latest thoughts around the strategic value there and how you fold that in with [MGM’s international aspirations].
Hornbuckle read between the lines and was much more direct in his answer:
I’ll just step in and kind of give the first part of it because I think it’s time to be definitive and give a little direction. The simple answer on Entain is no, we’ve moved on. While we remain highly focused on BetMGM’s business through our partnership with Entain and making sure that that business continues to grow, we see great potential in LeoVegas expansion capabilities.
(Quotes taken from The Motley Fool’s transcript of the call.)
MGM completed its $604 million acquisition of international operator LeoVegas in September 2022. That has given it a presence in the international online gambling space, which had been part of the rationale for its earlier attempt to acquire its business partner, Entain.
For now, that means business as usual for BetMGM. However, it leaves questions about how the companies would disentangle themselves if it became necessary.
The Failed 2021 Acquisition Attempt
BetMGM is the US market leader in the online casino vertical and overall online gambling revenue. Its success has hinged on the combined power of MGM’s brand and customer database and Entain’s technology and online gambling know-how. Entain, or GVC as it was known at the time, teamed up with MGM Resorts to create BetMGM in 2018.
Such joint ventures are convenient for launching a new product quickly in a growing and competitive marketplace. That certainly describes the US online gambling market in 2018.
They can also become problematic. Just as shared ownership of valuable property – or joint custody of a dependent – can create friction between individuals, it can bring companies into conflict, potentially escalating into a legal battle. And with BetMGM, there’s a lot of money on the line. Its annual income and expenditures are each over $1 billion.
That means they’re usually temporary affairs. One possible resolution to the situation is for one co-owner to acquire the other. MGM attempted to take that route in 2021. However, Entain rebuffed its advances, questioning the merger’s strategic rationale and saying the $11 billion offer was too low.
Even so, there appears to be no ill will between the companies. Hornbuckle had some kind words to say about Entain in his answer to Kelley:
I’ve said before, we like their technology platform and their leadership team. We’re also interested in the content studio business, we think there’s a real play there. We’ve seen that proven effective with brand when we combine great product in our brands at BetMGM.
What Does the Future Hold for BetMGM?
In principle, BetMGM could carry on as a joint venture forever. However, the longer it does so, the greater the likelihood that a strategic divergence or financial dispute could bring MGM Resorts into conflict with Entain.
A hypothetical legal battle over the joint venture would be hugely costly to both companies, regardless of its outcome. It would also be damaging to morale. Both companies would naturally like to avoid such a possibility.
Hypothetically, Entain could reverse the situation and try to acquire MGM. However, its doubts about the strategic wisdom of a merger make that highly unlikely. That leaves the companies with two other options should they find co-ownership awkward.
First, one could buy out the other’s share of BetMGM and make it a fully-owned subsidiary. Alternatively, they could spin it off into an independent, publicly traded corporation through an IPO or SPAC deal.
Both those options have the same problem: deciding on a price. As the dominant brand in a young market, BetMGM holds unique value. However, its long-term potential is hard to estimate because it depends on the progress of online casino legalization in the US.
Currently, most of the US market remains out of reach for regulated online casino operators, and expansion efforts seem to have bogged down. However, there’s a huge potential upside if what has happened for legal sports betting repeats itself with online casinos in a few years. What one projects for BetMGM’s revenue five or ten years from now depends entirely on what assumptions one makes about efforts like those currently underway for legal online casinos in Illinois, New York and Indiana.
So, the status quo may prevail until things become clearer on the legislative front.
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