MGM Stock Downgraded as DraftKings’ Entain Bid Puts Casino Operator in Tough Position

Posted on: October 1, 2021, 10:56h. 

Last updated on: October 1, 2021, 12:04h.

MGM Resorts International (NYSE:MGM) stock is trading higher today, joining other gaming equities to the upside despite an analyst downgrade of the Bellagio operator.

MGM stock
DraftKings’ bid for Entain has MGM in a tough spot. An analyst says outcomes aren’t appealing for the gaming company. (Image: Twitter)

In a note to clients today, Susquehanna Financial Joseph Stauff cuts his rating on MGM stock to “negative” from “neutral” with a $36 price target. That’s about 24 percent below where the shares currently reside, and well-below the consensus price forecast of $47.66.

Stauff’s downgrade of the casino giant is put in simple terms. The analyst sees DraftKings’ (NASDAQ:DKNG) pursuit of Entain Plc (OTC:GMVHY) — MGM’s partner on the BetMGM venture — as potentially diminishing MGM’s online prospects.

We see DKNG’s bid for Entain as consistently aggressive, out-maneuvering MGM for control of BetMGM and weakening its digital prospects in all likely scenarios,” said the analyst.

Late last month, DraftKings stunned markets with a $20.5 billion offer for Entain, which the target rejected. Showing it’s committed to consummating the marriage, the Boston-based sportsbook operator is floating a $22.4 billion cash and stock proposal for the Ladbrokes owner. Under UK law, DraftKings has until Oct. 19 to make a formal offer for Entain.

Risks for MGM Because DraftKings Isn’t Coming ‘in Peace’

While it’s been acknowledged that DraftKings’ bid for Entain puts MGM is tough spot, consensus is building that biggest hit to MGM in this scenario is that it will need to find a new technology partner for BetMGM.

Some market observers are putting a positive spin on things, from the MGM perspective, noting the gaming company must approve a takeover of BetMGM if that’s what DraftKings is angling for. If that’s not the case, MGM has cards to play to get what it wants, which is full control of BetMGM.

Susquehanna’s Stauff offers a compelling, contrarian view, saying the consensus view “incorrectly assumes DraftKings comes in peace,” implying it’s not reasonable to speculate DraftKings is pursuing Entain simply for technology, and that the suitor will go out of its way to accommodate MGM — one of its biggest competitors.

Stauff says even the best-case scenario for MGM is “still negative,” because if regulators or MGM itself block DraftKings’ bid for Entain, the casino company could still be looking at a substantial margin hit at BetMGM.

Other Unappealing Outcomes for MGM

To be fair, Susquehanna previously spoke glowingly about DraftKings’ run at Entain, framing it in terns of near-term pain, long-term gain for the stock.

For his part, Stauff sees one of two scenarios playing out. Either DraftKings buys Entain and accepts the 50 percent stake in BetMGM as a step toward owning the iGaming and sports wagering entity outright, or MGM is forced to come over the top and bid more than $25 billion for Entain. The analyst says either option could lead to “notable downside in MGM.”

MGM offered $11.06 billion for Entain in January and was rejected. But it was widely expected the suitor would float another bid before the end of this year.