Entain plays hold ‘em after MGM lays its cards on the table

Those lists of Britain’s world-leading technologies rarely mention gambling, but they probably should.

An £8bn takeover approach for Ladbrokes owner Entain from MGM Resorts International, its US joint venture partner, is further proof that UK is pre-eminent in extracting cash from punters. MGM’s all-share offer follows last year’s takeover of William Hill by Caesars Entertainment, and by Flutter’s defensively tilted purchase of The Stars Group.

While America dominates nearly everything online, its almost three decades of gambling prohibition allowed British operators to steal a march. Only since a 2018 law change has Las Vegas been playing catch-up.

MGM’s approach for Entain is similar but different to Caesars’ William Hill bid. That deal was all about taking control of a US minority. But MGM gains little strategically just from buying out Entain’s 50 per cent share of their BetMGM venture.

The bigger draw is Entain’s tech, which unlike most in the sector was developed in-house. GVC, as Entain was known until last month, built robust systems to help unite a pick-and-mix acquisition strategy for countries where other operators feared to tread. A combination with MGM brands such as Bellagio and Mirage, which have a greater recognition worldwide than an Entain roster that includes Betboo and Foxy Bingo, could create a formidable global player.

Brand value was the big attraction when Barry Diller’s IAC group bought a 12 per cent stake in MGM last August. The MGM share price has since doubled, meaning it can use equity as an acquisition currency.

Investors assume a better offer is on the way, though with MGM’s balance sheet already stretched any cash element may require Mr Diller’s involvement. MGM’s estimated $9bn net debt, versus 2021 ebitda of about $2bn, allows little room for generosity.

Neither is the rejected MGM offer intolerably low. Putting the US venture on the same rating as peer DraftKings suggests the rest-of-world operations are valued slightly lower than the historic average at nearly 10 times forward ebitda. Given a UK regulatory review and an HMRC investigation overhanging Entain, the discount is probably justified.

What about a counterbid? Don’t write off the possibility. Entain’s relationship with MGM is not as tight as William Hill’s with Caesars, which secured the acquisition only after threatening to collapse their joint venture if an interloper appeared. For Entain a change of control might only require MGM to buy the US venture at fair value. Allowing a rival to gain control of the tech is a worst-case scenario for MGM and a potential valuable bargaining chip for Entain. Its shareholders are probably wise to hang on for more.

Music to watch stocks by

The economics of music have changed almost as much as genres over the years. Music label Svengalis have been elbowed aside by, variously, ballsy bands, copyright pirates and streaming, writes Louise Lucas. 

The latter was supposed to hand control back to the artists but it is hard to keep the hand of big business out of the cookie jar. Just ask Taylor Swift, left out cold on the bleachers when her back catalogue — over which she had already spilled bad blood with manager Scooter Braun — was sold to private equity. 

Fellow artists can expect similar. Music publishers such as BMG and Universal run growing businesses predicated on royalties from back catalogues. These have been joined by upstarts founding entire businesses on the same premise — think Concord, Round Hill and London-listed Hipgnosis. No wonder. This is a business almost devoid of operating expenses and with rich seams to mine.  

Hipgnosis, which has spent more than £1.2bn on 100-plus music catalogues since listing in 2018, tops the UK charts. Its deal-a-week form shows no sign of abating. It kicked off the new year with the acquisition of Jimmy Iovine’s back catalogue of royalties and has signalled plans for a further £1bn spending spree.

Turning up the volume during the pandemic sounds sensible. More people, homebound, are streaming music — and concerts too, given the absence of the real thing. The issue is cost and what you get for your money. More buyers means higher prices. The average blended multiple paid by Hipgnosis has crept steadily higher: from 12.8 times historic annual income in catalogues acquired by end-September 2019 to 14.8 times a year later. Both numbers include the entire portfolio, implying a sharp increase in the cost of later acquisitions.

As to value, there are some rules of thumb. Olden goldies have an inherently higher currency: the staying power of good tunes allies with the growing ranks of older people taking to streaming — over-55s made up a third of the UK’s newcomers last year, according to ERA. Hipgnosis’ revenues from decade-old-plus songs rose 8 percentage points more than revenues from recent catalogues.  

But even these tunes can still surprise. It was only last Christmas, a full 36 years after its debut, that the Wham! hit of the same name topped the singles charts. Even older was Fleetwood Mac’s Dreams, which enjoyed a renaissance last year after a TikToker’s video to the tune went viral. As with pharma companies, a blockbuster can offset a slew of misses — but finding one in this case is far more luck than science.  

Entain: bryce.elder@ft.com
Hipgnosis: louise.lucas@ft.com