Eminence Capital Sends Open Letter to Entain Board of Directors Following Value Destructive Equity Offering
Eminence Capital, LP ("Eminence," "we" or "us") today issued the following open letter to Entain plc's (LSE: ENT) ("Entain" or the "Company") Board of Directors (the "Board") following the Company's recently announced proposed acquisition of STS Holdings and concurrent equity offering.
The full text of the letter is below.
June 16, 2023
To the Board of Directors of Entain plc:
Eminence currently has an economic interest (physical shares and total return swaps) of approximately 13.2 million shares of Entain, representing approximately 2.1% of the shares outstanding. We are longstanding shareholders having owned the stock since 2020.
Our long held view is that the Company controls two very valuable assets at different stages of maturity and whose combination under a single corporate structure obscures their true value: (1) a growing international online sports betting and gaming platform with leading market positions in key geographies; and (2) a 50% stake in the BetMGM JV, the number three player in the rapidly growing U.S. gaming market.
Over the last several years, we have engaged in constructive conversations with Entain's Chairman of the Board, Chief Executive Officer and Chief Financial Officer, and have always appreciated the Company's willingness to listen to our views about the best way to maximize long-term shareholder value. In particular, we discussed with the Company at length and on multiple occasions the need for a flexible approach to capital allocation. We have been explicit that Entain has earned the right to continue its pursuit of strategic targets within the global online gaming industry, but that equally important is funding these deals with the lowest cost of capital. We believe that multiple attractive and value creating paths exist for Entain to raise capital to fund its M&A initiatives, including the potential divestiture of some or all of its stake in the BetMGM JV.
We were therefore disappointed to learn that Entain has decided to fund the recently announced purchase of STS Holdings by issuing shares representing approximately 8% of its market cap. This approach is perplexing on many levels. While we can support the Company pursuing seemingly rational acquisitions, funding them with highly undervalued equity is an empire building, shareholder value destroying strategy. Further, that the Entain Board has previously rejected multiple takeover approaches at materially higher prices on the grounds that those offers undervalued the Company, but then turn around and issue equity at depressed prices for an asset that is at best a "nice to have" is illogical.
Moreover, while calling this deal "accretive" on an EPS basis may be technically correct, it demonstrates that management either doesn't understand finance or, worse, that they believe the Company's shareholders are naive. Issuing Entain stock at ~7x EBITDA (excluding the value of the BetMGM JV) to buy an asset at ~12x EBITDA is value destructive to shareholders, even with incredible synergies.
Since the deal announcement, Entain's stock price has dropped more than 8%, representing over £650 million in lost market value, nearly the value of the price being paid for STS.
The market reaction to this equity offering should be a wake-up call to Entain's tone deaf Board and management team. We can assure you that this particular shareholder is outraged and in light of the movement in the Company's share price we are clearly not alone in that sentiment. As shareholders lose confidence in Entain's ability to allocate capital and create long term value, it is quite likely they will support a sale of the company to MGM at a materially lower price than previously assumed.
Eminence will continue to make its voice heard in an effort to ensure Entain's Board and management do not make any further value destructive decisions.
Sincerely,
/s/ Ricky Sandler
Ricky Sandler
CEO/CIO Eminence Capital
About Eminence Capital, LP
Eminence is a global asset management firm founded in 1999 that currently manages approximately $6.5 billion. Eminence's investment approach is anchored in bottom up fundamental research seeking to identify "quality value" investment opportunities.
Eminence is publishing this letter solely for the information of other shareholders in Entain. This letter is not an offer to, or solicitation of, any potential clients or investors for the provision by Eminence of investment management, advisory or any other comparable or related services. This letter is provided merely for general informational purposes and is not intended to be, nor should it be construed as (i) investment, financial, tax or legal advice, or (ii) a recommendation to buy, sell or hold any security or other investment, or to pursue any investment style or strategy. Neither the information nor any opinion contained in this letter constitutes an inducement or offer to purchase or sell or a solicitation of an offer to purchase or sell any securities or other investments in Entain or any other company or an offer to arrange any transaction, or to enter into legal relations.
No representation is made as to the accuracy or completeness of any information contained herein, and the recipient accepts all risk in relying on this information for any purpose whatsoever. Without prejudice to the foregoing, any views expressed herein are the opinions of Eminence as of the date on which this letter has been prepared and are subject to change at any time without notice. Eminence does not undertake to update this information. Any forward-looking statements herein are inherently subject to material business, economic and competitive risks and uncertainties which are beyond Eminence's control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Nothing in this letter should be relied upon as a promise or representation as to the future.
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