DraftKings announced Tuesday that it was scuttling its $22.5 billion cash-and-stock offer for UK gaming conglomerate Entain.
“After several discussions with Entain leadership, DraftKings has decided that it will not make a firm offer for Entain at this time,” DraftKings CEO Jason Robins said in a statement.
Entain also issued a separate statement acknowledging the deal was off. The statements by DraftKings and Entain each included pronouncements for how their respective companies were well positioned for the future in their respective markets.
UK rules stipulate that for the next six months, Boston-based DraftKings is prohibited from making another offer to purchase Entain, with a few exceptions. Under the rules – specifically, the City Code on Takeovers and Mergers, aka the Takeover Code – DraftKings could make another offer in the next six months if:
- Entain’s board of directors agrees;
- a third party makes an offer for Entain;
- Entain announces either a reverse takeover or a “whitewash” proposal, the latter of which is where its shareholders meet for an independent vote on the issuance of new securities; or
- the UK panel that administers the Takeover Code believes the circumstances surrounding a potential deal have materially changed.
Shares of DraftKings were up 8% in pre-market trading on Tuesday, according to Susquehanna Financial Group analyst Joseph Stauff. In a note to clients Tuesday, Stauff said the increase likely represented “relief” from what analysts believed was “near-term pain from a huge premium for a large deal and the impact from potentially losing its US-pure-play focus.”
The latter stemmed from assertions by Bill Hornbuckle, CEO of MGM Resorts International, that DraftKings couldn’t consummate a deal with Entain without including MGM in the discussions. Hornbuckle insisted that if MGM were excluded from the talks, DraftKings would not be allowed to compete in the US market.
Analysts have been unsure if MGM held that kind of leverage. But it was no secret that MGM wanted to control BetMGM, the successful 50-50 joint venture (JV) it owns with Entain. In a twist, MGM made its own unsuccessful bid for Entain last January. That offer totaled $11 billion.
“While UK takeover rules prohibit DraftKings from initiating another bid for Entain for six months, if MGM were to bid within that period, DraftKings is allowed to counteroffer for Entain in that scenario,” Stauff wrote. “We’d guess the move to walk away was some combination of the 18% decline in DraftKings [stock] since September 20, the day before the bid went public, and an Entain shareholder base that may have wanted too much…”
Entain alluded as much last week when it extended the deadline for DraftKings to improve its $22.5 billion offer. One key sticking point Entain cited for a deal was “total value creation for Entain shareholders.” DraftKings had offered about $38.50 per share on September 19. Entain announced that DraftKings had made the offer, its second, on September 21.
“We are not surprised by this outcome, because we viewed this deal as just too complicated to close from the start,” JPMorgan analyst Joseph Greff said in a separate note to clients Tuesday.
Greff said concerns over a “proposed technology supply agreement to BetMGM and MGM,” another shortcoming of DraftKings’ bid that was cited by Entain last week, gave analysts pause, as did the challenges DraftKings faced in raising the amount of capital it would need to finalize the deal.
“What remains unanswered to us, at least, is why DraftKings launched this in the first place knowing the complications associated with closing a deal,” he wrote.
The news that DraftKings made an offer for Entain created a stir within the gaming industry and led to speculation that M&A activity could increase. It also led to questions about the future of BetMGM.
Entain, formerly GVC Holdings, has a large portfolio of casino and sports betting brands. That portfolio includes PartyCasino and partypoker, which are active in the US.