European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<p>On 4 January <a href="https://www.smartkarma.com/entities/entain-plc" target="_blank" data-smartkarma-citation="entities:23926:1" rel="noopener">Entain (ENT LN)</a> (formerly GVC Holdings) confirmed in a <a href="https://entaingroup.com/newsrelease/statement-in-response-to-press-speculation/" target="_blank" rel="noopener">statement</a> that it had received proposals from <a href="https://www.smartkarma.com/entities/mgm-resorts-international" target="_blank" data-smartkarma-citation="entities:16227:1" rel="noopener">MGM Resorts International (MGM US)</a> regarding a possible offer. The combination could create an operator with a large both online and physical presence through retail shops and casinos.</p>
<ul>
<li>The last offer has been <strong>0.6 MGM US x 1 ENT LN</strong>.</li>
<li>
<p>Based on closing prices on 31 December 2020 (last trading day prior to the announcement), the proposal represents <strong>1,383p</strong> per Entain share.</p>
<ul>
<li>Valuing the equity of Entain at c. <span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">£8,092 mn, i</span><span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">mplied EV of c. £10,206.2 mn and </span>a premium of 22% to Entain’s share price.</li>
<li>13x EV/Fwd EBITDA.</li>
</ul>
</li>
<li>
<p>Entain's shareholders would own approximately 41.5% of the combined company.</p>
</li>
</ul>
<p>The shares of Entain closed on 4 January at 1,420p, 25.3% higher than the previous close.</p>
<p>The move comes just a few months after Entain’s UK rival William Hill agreed to be taken over by its Las Vegas-based partner Caesars Entertainment. Entain shares shot up 25% over 2020, and if that rally continues, MGM or any other prospective buyer would be forced to pay up for Entain.</p>
<p>The key is the <strong>valuation of BetMGM</strong> and its future prospects in a in a very competitive market populated by deep-pocketed players.</p>
<p>The proposed offer price represents c. 8.0-9.0x trailing EBITDA, vs. 10.0x for comps and c. £3.5 bn for the stake in BetMGM.</p>
<ul>
<li>This offer, as the Board says, seems to undervalue the business.</li>
<li>I view MGM's move as an opening gambit, and believe there is room to sweeten the offer.</li>
</ul>
<p>By using the median of comparables 14.6x EV/Fwd EBITDA, the <strong>implied valuation for Entain would be 1,537p</strong>.</p>
<ul>
<li>This is 11% above MGM's offer.</li>
<li>Let us keep in mind that BetMGM does not currently contribute to the bottom line, for now, it is a <em>wild card</em>.</li>
</ul>
<p>By using Entain's projections for the US ($20.3 bn by 2025, and expected market share 15-20%), I will use the mid point, 17.5% share for a total revenue of $3.55 bn by 2025. By applying a 2.8x EV/Fwd Revenue multiple, in a blue sky scenario, the valuation of the JV could reach $9.94 bn, of which $4.97 bn for Entain (equivalent to <span title="Share Price as of Dec-31-2020 FY: 2020 Period End Date: Jun-30-2020 Period Type: LTM Value: £ 11.34, Currency: GBP">£</span>3,658 mn, not too far away from MGM's implied valuation, or <strong>625p per share</strong>).</p>
<p>Therefore my valuation for Entain would be between the base case of 1,537p and 2162p. Taking the <strong>mid point</strong> would give a longer-term <strong>TP of 1,850p</strong>.</p>
<p>Recommendation is <strong>LONG Entain</strong>, or set up the spread in the usual way, although the offer is likely to improve. I would not rule out a dawn raid by private equity.</p>
<p>By using the last closing price of MGM, the shares of Entain are trading 6.9% above the indicated terms.</p>

On 4 January Entain (ENT LN) (formerly GVC Holdings) confirmed in a statement that it had received proposals from MGM Resorts International (MGM US) regarding a possible offer. The combination could create an operator with a large both online and physical presence through retail shops and casinos.

The last offer has been 0.6 MGM US x 1 ENT LN.

Based on closing prices on 31 December 2020 (last trading day prior to the announcement), the proposal represents 1,383p per Entain share.

Valuing the equity of Entain at c. £8,092 mn, implied EV of c. £10,206.2 mn and a premium of 22% to Entain’s share price.
13x EV/Fwd EBITDA.



Entain's shareholders would own approximately 41.5% of the combined company.


The shares of Entain closed on 4 January at 1,420p, 25.3% higher than the previous close.
The move comes just a few months after Entain’s UK rival William Hill agreed to be taken over by its Las Vegas-based partner Caesars Entertainment. Entain shares shot up 25% over 2020, and if that rally continues, MGM or any other prospective buyer would be forced to pay up for Entain.
The key is the valuation of BetMGM and its future prospects in a in a very competitive market populated by deep-pocketed players.
The proposed offer price represents c. 8.0-9.0x trailing EBITDA, vs. 10.0x for comps and c. £3.5 bn for the stake in BetMGM.

This offer, as the Board says, seems to undervalue the business.
I view MGM's move as an opening gambit, and believe there is room to sweeten the offer.

By using the median of comparables 14.6x EV/Fwd EBITDA, the implied valuation for Entain would be 1,537p.

This is 11% above MGM's offer.
Let us keep in mind that BetMGM does not currently contribute to the bottom line, for now, it is a wild card.

By using Entain's projections for the US ($20.3 bn by 2025, and expected market share 15-20%), I will use the mid point, 17.5% share for a total revenue of $3.55 bn by 2025. By applying a 2.8x EV/Fwd Revenue multiple, in a blue sky scenario, the valuation of the JV could reach $9.94 bn, of which $4.97 bn for Entain (equivalent to £3,658 mn, not too far away from MGM's implied valuation, or 625p per share).
Therefore my valuation for Entain would be between the base case of 1,537p and 2162p. Taking the mid point would give a longer-term TP of 1,850p.
Recommendation is LONG Entain, or set up the spread in the usual way, although the offer is likely to improve. I would not rule out a dawn raid by private equity.
By using the last closing price of MGM, the shares of Entain are trading 6.9% above the indicated terms.

TMT & Consumer Independent Equity Research Analyst, Obex Capital Research

Aaron Gabin

TMT & Consumer Independent Equity Research Analyst

TMT & Consumer Independent Equity Research

Obex Capital Research

“Obex” is Latin for Barriers to Entry. Obex Capital Management’s investment philosophy is driven by an intense focus on which business model’s Barriers to Entry are able to withstand the ever increasing competitive disruption in the TMT and Consumer Sectors.

Equity Bottom-Up

<p>We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world today…offline to online transition of massive TAMs. Even the largest TAMs in the world – groceries, entertainment, autos, commerce, finance, real estate, etc. are still incredibly early in the long term replatforming of how the global economy functions.</p><p>What’s interesting this quarter is Covid’s impact, which was a tailwind for both ANGI and IAC for most of the year has morphed, and become a serious headwind for ANGI in the short term…but really only the short term. We view this pullback as a great entry point on ANGI for a longer term investor, because it is set up for an ongoing reacceleration throughout 2021 as the quirky supply/demand environment normalizes.</p><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world today…offline to online transition of massive TAMs. Even the largest TAMs in the world – groceries, entertainment, autos, commerce, finance, real estate, etc. are still incredibly early in the long term replatforming of how the global economy functions.What’s interesting this quarter is Covid’s impact, which was a tailwind for both ANGI and IAC for most of the year has morphed, and become a serious headwind for ANGI in the short term…but really only the short term. We view this pullback as a great entry point on ANGI for a longer term investor, because it is set up for an ongoing reacceleration throughout 2021 as the quirky supply/demand environment normalizes.Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

<p>We wanted to follow up on Match given we advocated it from the short side early in the year, and closed the short in May before the spinout. Is now the time to re-engage?</p><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

We wanted to follow up on Match given we advocated it from the short side early in the year, and closed the short in May before the spinout. Is now the time to re-engage?Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

<p>We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world today…offline to online transition of massive TAMs. Even the largest TAMs in the world – groceries, entertainment, autos, commerce, finance, real estate, etc. are still incredibly early in the long term replatforming of how the global economy functions.</p><p>COVID has turbocharged these trends, which may be why we’ve seen such massive outperformance by the stocks at the forefront of these trends.</p><div><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div>

We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world today…offline to online transition of massive TAMs. Even the largest TAMs in the world – groceries, entertainment, autos, commerce, finance, real estate, etc. are still incredibly early in the long term replatforming of how the global economy functions.COVID has turbocharged these trends, which may be why we’ve seen such massive outperformance by the stocks at the forefront of these trends.Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

Thematic (Sector/Industry)

<div><p>This week we highlight Match Group's independence, YouTube TV's price hike, and the sheer insanity of Spotify's 80% move. </p></div><div><div><div class="content-highlight"><p>Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.</p></div></div></div>

This week we highlight Match Group's independence, YouTube TV's price hike, and the sheer insanity of Spotify's 80% move. Obex’s fundamental research process is focused on secular change in the TMT and Consumer sectors. We seek to differentiate between fundamental business analysis and security analysis. Before deciding if a security’s pricing and positioning merit a long or short position, we analyze the four pillars of business fundamentals (Secular Factors, TAM, Competitive Advantage, Business Model) in order to determine if this is a “good” or “not so good” opportunity.

TMT Weekly: 3 Things that Stood Out The Week of 7/3/​​​​2020

United States

IAC Inc operates as a holding company. The Company, through its subsidiaries, provides media and Internet services. IAC serves customers worldwide.

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IAC (IAC US)

MGM's Prospective Offer for Entain

MGM's offer, an opening gambit, seems to undervalue ENT. Key is the valuation of BetMGM. My valuation for ENT ranges between 1,537p and 2162p. Mid...

Jesus Rodriguez Aguilar

IAC / ANGI 3Q20: A Tale of Two Cities

IAC and ANGI reported earnings that showed how Covid is boosting demand for its businesses...and in ANGI's case, boosting demand so much that its...

Aaron Gabin

Match 3Q20: Love Rollercoaster

We re-evaluate Match Group as we head back into pandemic-driven lockdowns. We thought it was a short a year ago, but now think its (going to be) an...

Aaron Gabin

IAC / ANGI 2Q20: Doubling Down

We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world...

Aaron Gabin

TMT Weekly: 3 Things that Stood Out The Week of 7/3/2020

This week we highlight Match Group's independence, YouTube TV's price hike, and the sheer insanity of Spotify's 80% move. Obex’s fundamental...

Aaron Gabin

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

MGM's Prospective Offer for Entain

MGM's offer, an opening gambit, seems to undervalue ENT. Key is the valuation of BetMGM. My valuation for ENT ranges between 1,537p and 2162p. Mid...

Jesus Rodriguez Aguilar

IAC / ANGI 3Q20: A Tale of Two Cities

IAC and ANGI reported earnings that showed how Covid is boosting demand for its businesses...and in ANGI's case, boosting demand so much that its...

Aaron Gabin

Match 3Q20: Love Rollercoaster

We re-evaluate Match Group as we head back into pandemic-driven lockdowns. We thought it was a short a year ago, but now think its (going to be) an...

Aaron Gabin

IAC / ANGI 2Q20: Doubling Down

We have always enjoyed following IAC because we share a worldview with management about investing behind THE major secular trend in the world...

Aaron Gabin

TMT Weekly: 3 Things that Stood Out The Week of 7/3/​​​​2020

This week we highlight Match Group's independence, YouTube TV's price hike, and the sheer insanity of Spotify's 80% move. Obex’s fundamental...

Aaron Gabin

TMT Weekly: 3 Things that Stood Out The Week of 7/3/2020