Entain has announced the completion of a quickfire capital raise of around £600m, through a Placing and Retail offer. The proceeds will be used to fund a new acquisition, Polish sports betting operation STS, with the remainder to fund further near-term acquisitions.
The deal will be actioned through Entain CEE, a joint venture with EMMA Capital, of which the former owns 75%. The total consideration for the deal is £750m, to be split 75/25 between Entain and EMMA.
STS is the market leader in Poland, led by its online business, representing 82% of its net gaming revenue. It's also the owner of the largest retail network in the country. Net gaming revenue has grown by an annual compound rate of 24% since 2020, with underlying cash profit (EBITDA) growing at 34% annually.
The deal is expected to be a net positive for earnings in the first full year of ownership.
The shares fell 9.7% in early trading.
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Our view
Shares of Entain took a hefty fall in early trading after it opted to dilute its equity to raise cash for the purchase of STS, the leading name in the Polish sports betting industry.
Strategically the deal makes sense, it continues the expansion into fast-growing regions and leverages many of Entain's existing capabilities. The price is a sticky point, and potential cost synergies of £10m in the grand scheme of things are pretty thin. The £750m total cost values STS at 11 times its expected cash profit (EBITDA), that'll drop to below 10 times if the synergies are delivered - but still, that's ahead of Entain's current valuation.
Looking at the wider picture, there's plenty to like.
Record levels of active customers over the first quarter was a key indicator that the underlying business is moving forward. That's even more impressive when you consider the World Cup at the back end of last year gave a short-term boost to activity that looks to have stuck around.
From here, we expect to see Retail growth cool, as some of those easier comparable periods fade into history. The higher margin online business is where we see the future of Entain, and the fact profit growth remains, despite the reopening of Retail stores, is a positive sign.
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 over the second half of 2023. Entain estimates the North American sports-betting and iGaming market will be worth approximately $37bn. 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 mainly to the group's continued spend on acquisitions. Expansion remains a key growth driver, the acquisition in Poland is the latest example. The capital raise should leave around £150m left over once the cash part of the STS deal has been settled, which we're told will be used for further acquisitions in the near term.
At the last check, underlying net debt was 2.8 times cash profit (EBITDA). That's a touch higher than we'd like to see, given there are increasing demands on cash - the revamped dividend being the latest addition. The capital raise, once the STS purchase has happened, should bring that down by around 0.3 times. But we'd expect a reversal of that benefit once the cash is put to use on further acquisitions.
Regulation, as ever, is a key risk. The German market remains challenging as a new regulatory regime kicks into action, but its enforcement lacks vigour. The good news for Entain is that they've been granted gaming licences, and the new regulator has signalled an intent to take action against unregulated operators.
The valuation remains well ahead of the longer-term average. We think its strong brands and growth opportunities underpin the valuation, but it certainly adds extra pressure to deliver - expect some bumps in the road.
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.
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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