Entain STS deal scolded by Eminence Capital

Entain Plc investor Eminence Capital has questioned the M&A strategy of the FTSE100 gambling group, citing that it has impacted the firm’s value and future prospects.

An open letter published by Eminence CEO Ricky Sandler criticised the board of Entain for allowing a £600m bookbuild to fund the acquisition of STS Group, through the issuance of new shares, which represents approximately 8% of its market capitalization.

Sandler brands Eminence Capital as a strategic long-term investor in Entain, which has built up a shareholding of 13.2m shares since 2020 – roughly 2.1% of Entain Plc. 

Eminence Capital contends that Entain’s two most valuable assets, its growing international online sports betting and gaming platform, and its 50% stake in the BetMGM JV for North America – have all been undervalued by Entain’s ongoing M&A strategy .

The asset management group asserts that investors should be concerned by the funding of M&A deals through”highly undervalued equity” which is a “value destroying strategy”. Furthermore, the leadership and corporate governance of Entain have been accused of ‘empire building’.

The letter further highlighted a perceived inconsistency by Entain’s board,  as it  had previously rejected takeover offers for being too low, but has now chosen to issue equity at “depressed prices”.

With regards to the STS deal, Eminence disagrees with the  claim that the acquisition is “accretive” on an EPS basis as Issuing stock at ~7x EBITDA to buy an asset at ~12x EBITDA is described as “value destructive”.

The fund noted the market’s negative reaction to the deal, as Entain’s stock price has dropped more than 8%, representing a loss in market value of over £650 million, which is almost equivalent to the price being paid for STS Group.

Sandler concluded: “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.

“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.”

A week of M&A activity saw Entain complete its £600m bookbuild, within 24 hours of announcing that it had agreed to acquire STS Group for £750m in a deal co-financed by CEE partner EMMA Capital – with the transaction approved by company investors.