Goldman Sachs downgrades Entain amid online growth concerns

Entain’s price target has been slashed from 1,450p to 820p, which is 2.9% lower than the closing price yesterday (27 November). Monday’s 844p closing price was also 1.7% less than the 859p it closed at on Friday.

This drop came as Goldman Sachs announced its downgrade of the Ladbrokes and Bwin owner. The reason for this, Goldman Sachs said, was due to Entain having problems with growth during recent months. Goldman Sachs said this is the result of regulatory headwinds, increased competition and market dynamics. 

This, it added, has particularly impacted Entain’s online gambling operations. Goldman Sachs has forecast Entain’s pro-forma online growth to be negative in Q4 of 2023 and H1 of 2024. The division, it added, is not expected to return to growth until the second half of next year.

Such is this level of concern that Goldman Sachs is also cutting earnings per share estimates for 2024 and 2025. The bank says this will be approximately 30% lower than previous stated, adding that free cash flow has also deteriorated.

BetMGM losing market share in the US

Goldman Sachs picked out several core issues currently impacting Entain. These include how its BetMGM joint venture with MGM Resorts International has lost market share in the US in recent times.

In its Q3 update, Entain said BetMGM held an 18% market share in US states where it offers online sports betting and igaming. This was level with Q2 and only slightly ahead of 17% during the first quarter.

Back in August, it was also revealed that MGM was launching BetMGM in the UK without Entain. Instead, MGM is working with LeoVegas, with the international platform utilising LeoVegas’ technology and platform. LeoVegas was acquired by MGM Resorts last year for $604m.

Incidentally, BetMGM is due to publish a business update next week on 4 December.

Entain’s £585m CPS settlement another reason for concern

Goldman Sachs also pointed to last week’s settlement with the Crown Prosecution Service (CPS) over historic activities in Turkey. On Friday, Entain announced an in-principle Deferred Prosecution Agreement (DPA) with the CPS over the issue.

Terms are in line with the provision announced on 10 August. Entain has agreed to pay a financial penalty plus disgorgement of profits totalling £585.0m (€674.3m/$738.9m). It will also make a charitable donation of £20.0m and contribute £10.0m to CPS and HMRC costs.

These will be paid in instalments over the term of the DPA. This will run for a period of four years from the date of the final court approval. Entain will seek final judicial approval in court on 5 December.

While the figure was quoted back in August, Goldman Sachs said this was still larger than expected. As such, it says it will impact performance at Entain moving forward, with the downgrade reflecting this.

Entain maintains that the operations in question are no longer part of the business and were sold off by the legacy GVC business in 2017. However, the case was enough for HMRC to launch a large-scale investigation in 2020.

Previously, Entain said the inquiry targeted former third-party suppliers. However, it later acknowledged historical misconduct involving former third-party suppliers and employees of the group may have occurred.

Changing face of Entain

The case led to major changes at Entain. Days before the investigation was confirmed Kenny Alexander stepped down as CEO. Shay Segev, Alexander’s replacement, moved to sports streamer DAZN, with Jette Nygaard-Andersen moving in to the CEO role.

Entain also shifted its place of management and control from the Isle of Man to the UK. This led to its tax residence moving as a result. In addition, it rebranded in 2020 to highlight how the corporate make-up of the business was differentiated from previous operations as GVC.

However, more bad news came in August 2022 when the GB Gambling Commission ordered Entain to pay a record £17m for social responsibility failings. This led to Commission chief executive Andrew Rhodes warning that the regulator could revoke Entain’s licence in the event of further breaches. Entain also paid a £5.9m settlement for similar failings in 2019.

Financial position and planned cost savings

While Entain reported a record H1 2023, its Q3 update showed online net gaming revenue growth had slowed to single figures.

Not long after this, Entain chairman Barry Gibson and CEO Nygaard-Andersen significantly increased their shareholdings. The chair’s spouse, Brenda Gibson, also increased her holding in Entain from 41,902 shares to 57,434. 

In addition, senior independent non-executive director Stella David secured a further 95,025 shares and non-executive director Rahul Welde purchased 21,644 more shares.

Also in its Q3 trading update, Entain unveiled Project Romer. This set out a goal of reaching an online EBITDA margin of 28% by 2026 and 30% by 2028.

To achieve this, Entain plans to simplify the group to improve operational leverage and drive cost efficiencies. This will include making cross cost savings of £100.0m by 2025.