IAC/MGM Resorts: waking up in Vegas

Las Vegas is a good place to go after a break-up. After spinning off its remaining stake in online dating juggernaut Match Group, Barry Diller’s IAC/InterActive Corp has announced a 12 per cent stake in MGM Resorts for $1bn. IAC is best known for incubating such digital stalwarts as Expedia and TripAdvisor. A gamble on MGM, which operates the Bellagio among several Las Vegas casinos, is surprising but astute.

Public companies almost never spend shareholder money on large minority stakes in other public companies as IAC has done for MGM Resorts. But IAC believes online and mobile gaming, like travel booking and romance, will eventually migrate in large part to smartphones. With gaming companies still largely tied to currently battered physical casinos, Mr Diller sees an opportunity.

According to IAC’s calculations, MGM’s core US gaming business — less its property and China stakes — is currently valued at just $1.5bn. Yet it throws off more than $2.5bn in operating cash flow annually. MGM’s share price, despite nearly tripling from its March low, remains well below the 2020 highs. Las Vegas has partially reopened but conventions have dried up as visitors shy away from air travel.

Meanwhile, Wall Street has discovered the allure of digital gaming and sports betting. State regulation restricts their online growth. In the US this remains less than a $1bn business annually. That could change. A US Supreme Court decision in 2018 removed barriers to online sports betting. Completed and pending public listings this year for DraftKings, Rush Street Interactive and Golden Nugget Online Gaming have proved popular. Optimists foresee more than $30bn in revenues annually if all states legalise internet gaming and sports betting.

IAC’s current market capitalisation is $11bn. Despite a good record building internet businesses, it has typically traded on a large discount to its sum-of-parts valuation. As if on cue, shares fell more than 1 per cent on Monday’s news, even as MGM rallied by more than a tenth. This suggests shareholders believe Mr Diller has jumped in too early and that Vegas, for all its glitz, will impose a harsh reality.

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