Entain has announced the acquisition of BetCity, one of the Netherlands' leading online sports and gaming operators. The deal's expected to cost €300m in cash at completion, plus up to €550m in further performance-related payments.
The deal's expected to complete in the second half of 2022 and should deliver around €28m in cost savings by the end of 2026. Entain's expecting to fund the deal using cash on hand, plus some of its available credit.
Entain CEO, Jette Nygaard-Andersen, said: "This acquisition will provide customers with an even better experience as we combine BetCity's local expertise and brand alongside Entain's market leading, customer focused platform. This transaction further underpins our growth strategy of operating in attractive regulated markets."
The shares were broadly flat following the announcement.
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Our view
The BetCity acquisition is another step in Entain's growth strategy, pushing into new regulated markets through a mix of organic and, as in this case, M&A led expansion.
The underlying business is enjoying the benefits as people return to in-person gambling. Retail revenue is approaching pre-pandemic levels.
As a result, online gaming has come under some pressure - but that was largely expected. The huge boost to online gaming last year as shops were closed was always going to lead to some tough comparisons. Importantly, some of the increased demand looks to be sticky. When you look over a longer period, gaming revenue has grown significantly in the last couple of years. This is particularly good news, because margins for the online business are a lot better than retail. It costs less to run a website than a shop.
A major shift back to bricks-and-mortar could see overall margins come under pressure, so it'll be key the group continues to attract and keep customers with its online brands.
BetMGM, Entain's joint venture with US-based MGM, has been a shining light for the group that's expected to start turning a profit in 2023. Entain estimates the North American sports-betting and iGaming market will be worth approximately $32 bn over the long term. Continued market share gains and the steady increase in the number of states in which the company operates suggest BetMGM could be in-line for a sizeable chunk of that money.
Debt crept up last year, owing largely to the group's acquisitions in Portugal and the Baltics. The group's already been active this year, most notably the BetCity acquisition. At last check, net debt was 2.4 times cash profit, but we'd expect that to move higher given recent acquisitions. It's not uncomfortably high, especially when you consider the c.£500m in cash on the books and free cash flow expected around £445m this year, but worth keeping an eye on.
Greater scale should help drive improved efficiency and while regulatory scrutiny remains high, Entain's geographically diverse footprint (over 50% of revenues are generated outside the UK at last count) helps mitigate the risk to some extent. The group's also taken steps to boost its ESG credentials, with increased focus on responsible gambling, and a shift to regulated markets that provide a greater degree of regulatory certainty.
The underlying business looks to be progressing well, with the group finding a good balance between building out its online presence and offering an in-store option. The BetMGM project offers a real growth driver for the future if execution remains on point. But with a price/earnings ratio some way ahead of the long-term average, there could be volatility in the event of any missteps.
Entain key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Trading Statement (all figures at constant currency, 7 April 2022)
Entain reported a 34% increase in first quarter Group Net Gaming Revenue (NGR), ignoring the effect of currency fluctuations. The return of customers to stores helped Retail return to within 5-10% of pre-covid levels. That helped offset a drop in Online NGR, as the division lapped exceptional demand the previous year.
BetMGM, the joint venture in the US, is now live in 23 markets and remains on track to deliver positive cash profits (EBITDA) in 2023.
CEO, Jette Nygaard-Andersen, said: ''Given the strength and continuing momentum of our underlying business, coupled with our proven ability to grow both organically and through M&A, we remain confident in our financial performance for FY22 and beyond.''
Online Net Gaming Revenue (NGR) was down 6%. That reflected lower volumes in Sports, with wagers down 4%, and a drop of 9% in Gaming. These were expected declines, as some of last year's demand returned to stores. Over a 3-year basis, online NGR has grown at an annualised rate of 14% per year.
Retail benefitted from the reopening of stores reduced restrictions, with performance within touching distance of pre-covid levels despite a smaller store estate. The group had an average of 4,333 shops during the period, compared to 4,662 the previous year.
BetMGM remains the second largest operator in the US with a 24% market share in areas it operates. The business boasts number one status for iGaming, with a 29% market share.
The group completed on 3 acquisitions over the period, Avid Gaming, Klondaika and Totolotek give exposure to Canada, Latvia and Poland.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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