Entain Suffers Double Downgrade by Goldman as Activists Circle

Posted on: November 28, 2023, 10:11h. 

Last updated on: November 29, 2023, 09:51h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Entain (OTC: GMVHF) endured a double downgrade by Goldman Sachs with the bank lowering its rating on the gaming stock to “sell” from “buy” late Monday evening.

An Entain lounge for employees
An Entain lounge for employees. Goldman Sachs double-downgraded the stock to “sell.” (Image: Entain)

In skipping over “hold,” Goldman slashed its price target on the Ladbrokes owner by 43.4% while admitting it’s been wrong on the struggling stock. The bank also mentioned softness in Entain’s online business, which the operator cited in September as the culprit behind a slack 2023 net gaming revenue (NGR) forecast, as one of the reasons for the downgrade.

We now expect Entain’s pro-forma Online growth to be negative in 4Q23 and 1H24, only returning to positive growth in 2H24,” Goldman analyst Ben Andrews wrote.

Goldman added that increasing competition, good fortune by bettors in the third quarter, and regulatory issues are among the woes prompting bearish revisions to Entain’s earnings per share (EPS) estimates. The operator recently agreed to pay $729 million to the UK’s HM Revenue & Customs (HMRC) office to settle allegations of bribery stemming from previously held operations in Turkey. The company departed that country in 2017.

Andrews pared his 2024 and 2025 EPS forecasts on Entain by approximately 30%.

BetMGM Thorn in Entain’s Side

BetMGM, of which Entain owns 50%, is also becoming a drag on the operator’s results. The 50/50 joint venture between Entain and MGM Resorts International (NYSE: MGM) is losing market share to DraftKings (NASDAQ: DKNG) and FanDuel, the top two operators in the US online sports betting industry.

Making matters worse is the fact that while DraftKings and FanDuel are firming their duopoly, competition for the remaining market share is intensifying with Bet365 expanding its US footprint and with the recent entries of ESPN Bet and Fanatics into the market.

Previously, Goldman expected BetMGM to turn significantly profitable in 2024 with a potential return of capital to Entain and MGM. Now, Andrews expects Entain and MGM to reinvest any 2024 profits generated by BetMGM back into the business.

Those could be among the reasons why some analysts are pushing Entain to consider evaluating some form of compromise regarding BetMGM, including possibly simply divesting its stake in the unit to MGM. At the Global Gaming Expo (G2E) in Las Vegas last month, Entain CEO Jette Nygaard-Andersen told attendees that joint ventures don’t last forever, but it remains to be seen if the gaming company is looking to depart BetMGM over the near term.

Downgrade Could Be Fuel for Entain Activists

Goldman’s double downgrade of Entain shares arrived just days after it was revealed that Dendur Capital and Sached Heam Capital, two New York-based hedge funds, took large stakes in the stock.

Those money managers are making clear they are activists and they are pushing the Entain board to give a seat to Eminence Capital founder Ricky Sandler. Dendur Capital and Sached Heam also want the board to allow Sandler to have a role in filling other director vacancies.

Goldman’s Thomas also mentioned Entain’s weakening free cash flow position, which could further embolden the activist investors to push for a sale of the company, something Thomas acknowledges as the primary “upside risk” for the stock.