MGM Could Look to Unlock BetMGM Value, Says Analyst

MGM Could Look to Unlock BetMGM Value, Says Analyst

Could 2018 be the year when MGM Resorts International (NYSE: MGM) takes action to buy the 50% of BetMGM that it does not already own and looks into ways to increase the value of that business for investors?

According to one analyst, they are potential outcomes. Texas Capital analyst David Bain began covering the Bellagio operator by pointing out that the entry of BetMGM competitors DraftKings (NASDAQ: DKNG) and FanDuel parent Flutter Entertainment (NYSE: FLUT) into prediction markets may force investors to look at alternative digital gaming growth vehicles. That might encourage MGM to consider BetMGM's choices.

"We believe this, in turn, should re-expose circular, digital/omnichannel benefits and the significantly implied lower digital valuations of MGM and Caesars versus digital peers,” observes Bain who rates MGM a “buy” with a $56 price target.

The prospect for Caesars Entertainment (NASDAQ: CZR) to spin off its internet operations is the subject of much conjecture. While MGM and Entain Plc (OTC: GMVHY) each control half of BetMGM, that operator would have an easier lift because it fully owns its interactive unit.

Returns of BetMGM Speculation

As the company's finances continue to improve, MGM leadership has made it apparent that it wants complete control of BetMGM. It remains to be seen how and whether such a transaction occurs.

As Bain notes, MGM has the option to either purchase the owner of Ladbrokes altogether or buy out Entain's 50% share in the online sportsbook operator. Five years earlier, the Luxor operator tried to accomplish the same thing but was turned down. However, five years is a long time in the corporate world, and there is a sell-side belief that Entain is stabilizing after years of leadership changes and that this may be the moment for the company to make money off of its BetMGM stake.

“BetMGM consolidated in MGM financials and the optionality of a partial (or full) spinout of the business while maintaining the digital benefits to its land-based business should support a higher overall valuation, in our view,” says Bain.

Although he admits there haven't been "strong checks suggesting any potential price bogey of late," the Texas Capital analyst notes that Entain trades at 8x estimated 2026 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) and that MGM would probably need to offer well north of 10x EV/EBITDA if it wanted to buy the company outright.

iGaming Attracts MGM to BetMGM

Although iGaming is probably the cause of that desire, there is still a long way to go before MGM can even entertain the concept of spinning off BetMGM to public investors. Bain points out that BetMGM's 20% US iGaming market share contrasts favorably with FanDuel and DraftKings' 25% and 24%, respectively, highlighting the possibility that BetMGM may be valued similarly to those competitors on an independent basis.

Furthermore, despite the general consensus that no state would pass legislation pertaining to online casinos this year, it's plausible that market growth will compel lawmakers to change their minds.

“While there is little momentum in any state for new iGaming expansion fiscal state concerns could reverse the current lack of momentum,” concludes Bain. “Overall, we believe additional iGaming state expansion is a “matter of time,” though timing visibility is admittedly low. Notably, almost all states are already ‘a little pregnant,’ with other approved forms of gaming.”