DraftKings’s BetMGM conundrum

No stranger to overly populated conference calls with bankers and lawyers, DraftKings is in a race to gain scale and there is some sound logic to the $22.4bn bid for Entain.

Ownership would give it a much wider global footprint, bringing both expertise and technology alongside between £850-900m ($1.17-1.24bn) in forecast EBITDA for 2021. In contrast, DraftKings made an adjusted EBITDA loss of $234.5m in the first half.

By any measure, it makes a great deal of sense.

Any measure bar one, that is: logic.

The question of what happens to Entain’s joint-venture share of BetMGM blows apart an otherwise simple M&A equation.

Have to go through MGM first

There are no two ways around it; to get to a final deal DraftKings will have to go through MGM and that conversation will revolve around what on paper looks like an irresolvable quandary:

DraftKings must want everything that Entain has to offer in terms of technology, marketing and trading expertise. Not incidentally, it could also bring to a halt its own cash burn while  also bringing Entain’s brands (particularly in gaming) to a new audience.

But the expertise is exactly what Entain brings to the BetMGM joint venture. As per various earnings calls and analyst fireside chats in recent months, MGM can bear witness to the value of the technology, marketing and trading expertise Entain brings to the business.

DraftKings and MGM can’t both have that expertise, can they?

Questions but no answers

The analysts and commentators have been left pondering how to square a circle.

Could Entain’s tech somehow be shared? It’s hard to see how – BetMGM is a direct competitor to DraftKings and sharing the fruits of your M&A is surely a bad strategy.

Even if an arrangement on tech could be forged, what about the rest of what Entain brings to BetMGM?

BetMGM is now an entity in its own right with its own market-specific skill base. Yet the extent to which it still relies on the Entain skill base is hard to know, as would be the effect of taking away the wellspring of betting and gaming know-how.

Without knowing the answer to these questions, it makes pricing up the value of the Entain share of the JV that much harder.

Could BetMGM be floated as a separate entity as has been rumored? That would still likely involve a tech licensing deal and mean prospective investors would get to ask the same questions as above.

Could DraftKings buy MGM out as well? Well, that is possible but it would, first, be a very expensive solution for DraftKings and second, it would leave MGM without a digital strategy by which to continue its much-spoken about omni-channel strategy.

Could MGM throw its lot in with DraftKings? Potentially, DraftKings could also buy MGM.

The MGM what-ifs

The other area of speculation suggests MGM could opt to renew its own bid for Entain. Yet, since being rebuffed in January with what now appears to be a low-ball offer, MGM has shown little enthusiasm for going down this route.

Comments from recent analyst fireside chats would suggest MGM is very happy with the status quo. After all, why disrupt the apple cart when it appears to be producing the goods?

Or maybe MGM took another look at the regulatory issues faced by the rest of the Entain business and had second thoughts. That $11bn-plus cash pile it has amassed could be put to multiple uses and MGM’s investors might be less than keen on all of that and more being splurged on Entain.

Yes, MGM could attempt what rival Caesars has just done with William Hill: strip the US elements from Entain and sell the international husk. But William Hill had separate tech in the U.S. BetMGM doesn’t. 

Gaming the thought process at DraftKings

What is the likelihood that DraftKings knows all this? That it would be hard to untangle Entain from BetMGM. That MGM might not have the appetite for taking on the full Entain ticket.

Management there might be calculating that disruption for its rivals might be a good thing right now. It’s the kind of move made by the tech giants. Making bold headline-grabbing and sector-defining moves while wielding highly-rated paper like some sort of club.

Such a strategy has its appeal – but DraftKings is no Facebook. It doesn’t yet have the profits for that or the dominant market share. Or really the tech (don’t @me about SBTech). Hence why it wants Entain. A deal would bring at least two of those but at the cost of DraftKings becoming a much more complicated story. 

Now, its investors may like this global play. Alternatively, though, they may baulk and consider the recent GNOG deal (remember that?) as enough consolidation for now.

We will soon find out. The put-up-or-shut-up date is October 19 and by 5p latest that day we will either get a view of a more detailed DraftKings bid or it will be shelved. Or MGM will throw its hat into the ring again. Or someone else will come along with a higher bid. Or DraftKings will bid for MGM as well.

Which means everything is in play. And in that scenario, no one has all the answers.