Into the future: how Q3 2022 could be the turning point for Entain

After posting a 2% year-on-year (YoY) rise in net gaming revenue (NGR) for Q3 2022, Entain’s operations have seen its growth slow after a previously unheralded epoch of sustained success. Twenty-three consecutive quarters of double-digit growth are now a thing firmly of the past, with the FTSE 100 operator undertaking a balancing act, which is seemingly leaving it in statis.

The balancing act, of the old and new worlds, are almost polar. The still-nascent US market is proving to have been a good bet by the firm. Its 50/50 BetMGM JV with MGM Resorts International returned more than $400m in NGR for Q3, representing a 90% YoY uptick, with the firm increasing its market share to 25% and reaffirming expectations to finally record positive EBITDA in 2023.

And while BetMGM appears to be getting all the attention, Entain’s stalwart brands in the UK continue to battle against looming regulation and increased affordability measures. In fact, attention has shifted away from the market, with Entain CFO Rob Wood previously telling EGR the UK was becoming an “ever-smaller piece of the pie”.

The UK represents 29% of Entain’s global business, so while it is not entirely dismissible, the widening of the firm’s geographic reach, with a return to the Netherlands upcoming and an Eastern European expansion following the acquisition of Croatia’s SuperSport earlier this year, means market needn’t be the determining factor of Entain’s operations.

UK heartache 

Touching on the performance of the UK, which previously suffered a 15% downturn for NGR in H1, Wood revealed that Entain had performed better in Q3, citing trends had “improved significantly” but there was still negative growth in the market.

Wood said Entain’s UK operations have been hampered by the “ongoing implementation of responsible gambling measures” which had resulted in a lower spend per head, but the macroeconomic environment wasn’t causing any greater damage than in Q2.

Wood said: “In the UK, year-on-year trends improved significantly versus H1, despite the ongoing affordability measures being implemented by leading operators. [Growth] was still negative, but only marginally so. We’re really pleased with that progression as [we were] closer to flat in Q3, the difference of course is moving away from lapping lockdowns in the prior year.

“Ordinarily you’d expect at least mid-single-digit growth out of the UK market, and really it is two things: one, it’s the ongoing implementation of measures, particularly around affordability; secondly, as we talked about in Q2, there is some impact on the consumer from the macro environment,” he added.

Entain remains positive on the group’s Q3 performance, despite online NGR rising just 1% YoY and falling 2% in constant currency, which the business noted was “broadly in line with expectations”.

Coupled with tough comparisons thanks to Covid-19, H2 2022 also represents a financial period unlike any other for operators. The World Cup in November will give a welcome boost to Entain’s coffers, not just thanks to its UK operations, boosted by England and Wales’ presence in Qatar, but also its ever-growing geographical spread.

Edison Group director Russell Pointon said the presence of the World Cup would significantly mitigate fears over consumer spend and the cost-of-living crisis, therefore giving Entain a shot in the arm for Q4. He said: “Expanding its sport offering, the betting operator has acquired [Avid Gaming, BetCity and SuperSport] already in 2022, an expansion which will maximise benefits from the upcoming World Cup. This will likely also offset the potentially significant impact of further inflation and tighter consumer budgets, leading Entain to forecast year-on-year growth in Q4.”

Party in the USA

While the UK failed to inspire, Entain’s attention on the US and BetMGM is clear to see. In the year to date, BetMGM has returned around $1bn in NGR, despite the seasonally quiet months of July and August for the US sports scene, while rolling out an updated sportsbook app and unveiling heavy-hitting ad campaigns featuring actors Jamie Foxx and Vanessa Hudgens. With its 25% market share (excluding New York), rising to 31% for igaming alone, Entain confirmed BetMGM was on target to hit “sustainable positive EBITDA” in 2023. CEO Jette Nygaard-Andersen said this would represent a “milestone” moment, before unveiling what the future could hold post-2023 during the analyst call.

“When we reach [positive EBITDA], that could open up further opportunities for us. Whether it’s through dividend or whether we could look at an IPO,” Nygaard-Andersen said.

However, tails shouldn’t be set wagging just yet at the prospect of spinning off BetMGM in an IPO. According to the latest figures, Entain’s share of BetMGM’s losses in H1 2022 amounted to £108.6m, increasing from a loss of £78.2m in 2021. If the desire is to bring this down by 2023, a shift in strategy may well be needed.

Additionally, Entain’s group net debt as of H1 2022 stood at £2.2bn, representing a net debt to EBITDA ratio of 2.3x. This could be even further impacted by rising interest rates, which in H1 saw an interest accrual of £22.4m on the debt, before serious inflation worries gripped the UK and Europe.

Speaking to EGR, Goodbody’s David Brohan said the impressiveness of the US segment had helped alleviate Entain’s shortcoming in other divisions, especially given the knock-on impact of a particularly difficult H1. Future regulation in the US will also dictate Entain’s strategy, according to Brohan.

He notes: “While Entain’s online business was a touch below our expectations, the company has returned to growth following a challenging H1. The US business continues to perform extremely well and, on the assumption that California is unlikely to pass in November, the focus will continue to shift towards profitability next year.”

With Proposition 26 (Tribes) and Proposition 27 (commercial operators) looking likely to fall short when voters cast their ballots in November, Entain will certainly be keen to make in-roads on the West Coast to build on current success in the states.

Markets maketh M&A

Entain’s M&A strategy shows no signs of easing up, despite the macroeconomic environment. The acquisitions of Canada’s Avid Gaming, Dutch brand BetCity and Croatian market leader SuperSport in 2022 alone, along with the purchase of Baltics operator Enlabs and esports betting startup Unikrn in 2021, shows an M&A pipeline in rude health.

In fact, touching on the economic climate’s impact on any further deals, Nygaard-Andersen said rising interest rates could in fact act as a catalyst to potential deals and that Entain is readying for attack while others take a backseat.

Nygaard-Andersen said: “While interest rates are not helpful, it doesn’t prohibit us to continue M&A. In the current environment, I would say it might even open up new doors for us and opportunities where we are looking at things and others are pulling back.”

While Entain has steadily deployed a bolt-on approach for M&A cherrypicking key geographies for expansion with leading local brands, is Entain vulnerable to an approach itself?

In October 2021, DraftKings withdrew its $22.4bn offer for Entain as the US sports betting, casino and daily fantasy sports giant looked to capitalise on its own surging valuation. Fast forward 12 months and DraftKings’ market cap has plummeted to $5.92bn. Entain’s now sits at £6.91bn. Could MGM Resorts International, which recently acquired LeoVegas, table another bid for Entain after its £8.1bn offer for its JV partner in January 2021 was rebuffed? It’s certainly possible given Entain’s valuation.

The third quarter of 2022 may not go down as the most memorable reporting period in Entain’s history, yet it could truly become one of the most significant. An opportunity to make a move for a public rival, embattled with a falling share price, could herald in the next era of cannibalisation. If the debt can be managed and US profitability secured, Entain could soon well be the new king in town; or face the fate of the M&A machine itself.