IAC Unconventional MGM Investment Earns Rave Wall Street Reviews

Posted on: August 11, 2020, 09:21h. 

Last updated on: August 11, 2020, 12:59h.

IAC/InterActiveCorp’s (NASDAQ:IAC) purchase of $1 billion worth, or 12 percent, of MGM Resorts International (NYSE:MGM) equity, news revealed on Monday, is eliciting praise from analysts covering both companies. Some are saying it’s further confirmation of the growth expectations associated with online gaming.

Analysts Praise IAC Deal With MGM
IAC’s $1 billion investment in MGM is widely viewed as an endorsement of online betting. (Image: Wall Street Journal)

By its own admission, IAC typically doesn’t acquire common equity stakes in companies. But that’s exactly what it did with the Mandalay Bay operator. It is betting that a company with what Barry Diller’s firm says has little internet penetration today will blossom into a force in the fast-growing online casinos and sports betting industries.

MGM’s online footprint centers around BetMGM, a 50/50 partnership with GVC Holdings. Last month, the two operators boosted funding for that business to $450 million from $200 million. Analysts applauded the gaming company’s ability to lure IAC as an investor without parting with a lucrative asset.

We view MGM’s success in attracting IAC as a strategic investor as a creative way to partially unlock the value of its digital business without having to sell any assets or give up any additional ownership,” said Union Gaming analyst John DeCree in a note to clients.

DeCree lifted his price target on the Bellagio operator to $27 on the back of the IAC news, saying $7 of that forecast is ascribed to the 50 percent BetMGM interest. His estimate is well above the Wall Street average on MGM stock, which is $18.43.

Shining Light

A multi-month closure of land-based casinos forced by the coronavirus pandemic is the latest catalyst for internet casinos and sports wagering.

Over the course of the shutdown, gamblers, in states where it’s permitted, embraced iGaming and sports bettors flocked to obscure offerings, such as darts, international baseball and table tennis, while US sports leagues were on the sidelines.

Jefferies analyst James Wheatcroft says IAC’s MGM investment will bring new attention to the online gaming opportunity. He estimates sports wagering in the US alone could eventually be a $19 billion business, generating $5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) for operators. His internet casinos forecast is double that.

DeCree notes that given IAC’s track record of success with internet businesses, including ANGI Homeservices, Expedia, Match, and Ticketmaster, the firm’s investment in MGM isn’t just an endorsement of the operator, it’s a vote of confidence for the broader online gaming industry.

Leveraging Specialty

One of IAC’s specialties is turning offline customers into online patrons, something it’s done to the tune of 15 million subscribers across its internet properties. There are possible synergies with MGM on that front because the operator brings 34 million M Life Rewards members to the table.

“Our history in driving off-line to on-line conversion gives us confidence in the path and, like other industries we’ve seen transform, a conviction that it will be assisted by natural tailwinds,” said IAC.

Jefferies analyst Brent Thill, who covers IAC, said the company’s MGM investment jibes with its history of being early to offline-to-online shifts in other consumer-related industries.