Entain can afford to be choosy in the suitors it accepts. Since the start of last year, the owner of the Ladbrokes and Coral brands has rejected takeover approaches from MGM Resorts, its joint venture partner in the United States, and from DraftKings, the No 3 player in the American market. And the two players at the table have been steadily upping the ante: a cash-and-shares offer of £28, the second of two proposals put forward by the latter in September, was way higher than the £13.83 all-share deal proffered by MGM nine months earlier.
The prize on the table is BetMGM, that high-growth American business for which Entain provides the technology that powers its games and products. Its value was revealed in fourth-quarter trading figures at Entain — one of the world’s biggest sports betting and gaming groups, with brands such as include Bwin and Coral and 4,425 betting shops in the UK, Italy, Belgium and the Republic of Ireland — that were ahead of the company’s own expectations. The volume and average value of players within the US sports betting market was higher than anticipated, which together with a recovery in revenue from its betting shops elsewhere means that earnings for last year should be between £875 million and £885 million, the upper end of its previous guidance range.
The attractions of the American market have not been lost on rivals, which are spending large sums on winning new business, but BetMGM is holding its own. Over the three months to the end of November, its share of the sports betting market in America rose to 18 per cent, from 17 per cent at the end of August.
That places BetMGM behind FanDuel, the US betting division of the London-listed Flutter Entertainment, which partly accounts for the lower market valuation attached to Entain compared with its FTSE 100 peer. Shares in both groups have accelerated in the past three years since sports betting was legalised in the US in 2018, but takeover interest has led to Entain outperforming its larger rival over the past 12 months.
The shares’ forward earnings multiple of 32 is predicated on the huge marketing and administrative costs incurred in its pursuit of US expansion giving way to impressive profit growth. Based upon earnings for 2023, when the American business is expected to hit profitability, that valuation multiple falls to just under 16. That’s versus a multiple of 20 for Flutter, based upon earnings forecasts for that same year.
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Gaining more customers in the US and snapping up smaller rivals in emerging gambling markets is the priority in terms of capital allocation, so shareholders shouldn’t expect any great bump in the dividend or a reduction in leverage. Net debt stood at 2.2 times earnings before tax and other charges at the end of June, below a ceiling multiple of three targeted by management but above a medium-term goal of two.
That doesn’t mean there aren’t some hurdles, or potential sticking points for potential bidders. First, there’s the government’s white paper into gambling safety in Britain, expected during the first quarter of this year. Entain wouldn’t suffer any impact until the end of this year, at the earliest, reckons Jette Nygaard-Andersen, its chief executive, but analysts expect the paper to curtail UK market growth. Then there’s a recent turnover tax on online poker and slots products in Germany.
Entain is shooting for a 20 per cent to 25 per cent share of the US betting market. It’s ability to execute on that is promising, it already has 24 per within the states it operates in, and, given those numbers, more bidders could come knocking on its door.
ADVICE Buy
WHY Extent of the discount attached to the shares does not appear warranted as it expands in the US market
Workspace
The way flexible office providers tell it, they’re set to be big beneficiaries of a potentially permanent shift towards hybrid working; to judge by the share price of Workspace, the FTSE 250 constituent that typically leases space on six-month terms, the market is not fully buying into the argument.
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The shares trade at a 6 per cent discount to the net asset value forecast by analysts at the end of March and are still roughly a third lower than their pre-pandemic level. Admittedly, there have been two catalysts this week for improving sentiment: first, the planned removal of Plan B restrictions, which will mean the end of work from home guidance; second is some tangible proof that occupancy has the potential to improve once restrictions are lifted. Occupancy had increased to 86.6 per cent at the end of December, up from 82.9 per cent six months earlier, despite an unsurprising drop in new lettings as the Omicron variant of coronavirus emerged towards the end of last year.
Occupancy is crucial because, like its rivals, Workspace sets rent rates based upon market demand. Average rent per square foot is still roughly 10 per cent below the pre-pandemic level. Reaching an occupancy level of about 90 per cent would be a turning point in lifting rates closer to pre-pandemic prices. There is no fixed date for hitting that target, though the company reckons it will be nearer at the end of March. Stifel, the broker, thinks that the “critical” point will not be reached until March next year.
Unlike IWG, owner of the Regus brand, and WeWork, Workspace owns all of the properties it lets out to businesses. It’s a feature of the business model that removes the mismatch between the short-term leases agreed with customers and the long-term liabilities owed to the owners of the property freehold. In November it bought the 104,000 sq ft Busworks building in Islington, north London, for refurbishment and with cash and undrawn debt facilities totalling £225 million, is on the lookout for more deals of that kind. However, a relatively protracted recovery could mean that the shares tread water for a while longer.
ADVICE Hold
WHY Small discount attached to the shares does not represent compelling value