Description

Disclaimer:

This writeup is for information purpose only, is not investment advice, and is not a recommendation, solicitation, or offer to buy or sell any security. Information contained in this document may constitute forward-looking statements or reflect the opinion of the author as of the date written. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. This material has been prepared from sources and data believed to be reliable and is subject to change without notice. No representations are made as to the accuracy or completeness of this material, and the author does not undertake any obligation to update or review any information or opinion contained herein.

The author of this posting and related persons or entities held a long position in securities mentioned as of the date written. Such position is subject to change at any time without notice. The Author is a trader in securities and makes no undertaking to inform the reader or any other person prior to or after effecting any transactions.

No person should make any investment decision on the basis of this material. Investors should seek expert legal, financial, tax, and other professional advice prior to making investments in securities. Past performance is not indicative of future results.

PDF version here: https://drive.google.com/file/d/1FetvAGZjlBTkhtaOH9meTZ1F07gC8kdr/view?usp=sharing

Summary and Thesis:

At current levels we believe MGM Resorts International (NYSE:MGM) represents an extremely attractive investment – very strong downside protection, line-of-sight to >100% upside, and much greater long-term upside.

This write-up will consist of an upfront thesis summary, followed by a more detailed examination.

Our key thesis points for MGM are:

1. MGM currently trades at its pre-COVID price, despite:

• Repurchasing 22% of shares since 12/31/19 (and 32% since 12/31/17).
• Selective selling assets at premium valuations, leaving MGM with its best portfolio – most concentrated and highest quality – ever.
• Having its strongest balance sheet ever – large cash balance and semi-perpetual very attractively priced liabilities.

2. High quality and robustly cash flowing domestic portfolio covers the current share price:

The fulcrum questions around the domestic portfolio are: a) how will the topline hold-up against deteriorating macro conditions; b) where do EBITDAR margins, which have improved materially vs. pre-COVID levels, shake out on a normalized/sustainable basis?

In short: we believe revenue will prove resilient and EBITDAR margins will settle comfortably above 30%.

The analysis at the end of this section incorporates those basic assumptions.

3. MGM China Holdings (SEKH:2282) represents material value + optionality:

MGM owns 56% of SEHK:2282, which at current market prices is worth $6 per MGM share. We believe SEHK:2282 possesses substantial upside based on the combination of: a) relaxation of the extreme COVID policies that have gutted Macau’s gambling industry over the last 3 years; b) the Macau gaming license overhang has recently been removed. A rerating of SEHK:2282 would yield meaningful additional value to MGM.

4. BetMGM is a world-class asset (in the making)

We believe the US online gaming market is coalescing around no more than 4 primary players (BetMGM, NASDAQ:DKNG, NASDAQ:CZR, and LSE:FLTR (FanDuel)). Further, we think that BetMGM – the leader in iGaming – is best positioned amongst those over the long-term. Based on estimates of the US market size, steady state margins in mature EU and other regulated markets, and margins in relatively mature US states, we can estimate a range of steady state earnings. In short, we think $4bn of revenue and >$1bn of EBITDA in 2025 is eminently reasonable, yielding an EV for the business of $10bn, of which MGM owns 50% or $13 per MGM share. But BetMGM could end up being a much more valuable business than that.

5. Further material of optionality exists, for which are we are not ascribing any specific value:

• Merger with or acquisition of Entain PLC (LSE:ENT) – the economic logic of this combination is overwhelming (MGM previously bid in January 2021) and we believe would result in the most valuable and best positioned gaming company in the world with enormous top-line and expense synergies.
• Absent a deal with LSE:ENT, MGM may successfully pursue a roll-up of international digital assets on the back of its LeoVegas (for which it paid $600mm and closed 8/31/22).

Conclusion:

All in all, we think MGM represents an extremely attractive investment – very strong downside protection, line of site to >100% upside, and much greater long-term upside. The summary valuation exhibit below illustrates the risk/reward. The question of how to incorporate MGM’s contractual lease payments is something we discuss at length in the more detailed examination:

(Parenthetically, we pitched IAC last year and it’s turned out horribly. That said, we believe it’s extremely attractive and a fantastic way to gain exposure to MGM).

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MORE DETAILED EXAMINATION:

High quality and robustly cash flowing domestic portfolio covers current share price:

Primary points:

1. MGM’s domestic portfolio is concentrated and heavily skewed to premium properties
2. Wagering activity is resistant to economic pressures going back 30+ years
3. Good reason to believe most post-COVID gains are sustainable
4. Even assuming some give-back of gains, domestic ops still pay for the entirety of MGM

MGM is the largest casino operator in the US (and the world) by revenue, built upon a concentrated portfolio of high-quality casino-hotel assets. As opposed to other US peers, MGM doesn’t operate all that many properties relative to the company’s size, preferring to concentrate their portfolio in large and premium properties, both in Las Vegas (LV) and around the country (regionals). While some of MGM’s larger peers also have some hallmark properties, they are generally few and/or diluted within a larger portfolio of small, lower-quality properties, which makes MGM’s portfolio cleaner and distinct. To wit, MGM’s 9 LV properties and 7 of its regional properties are large-scale casino-hotels (only 2 of MGM’s regionals don’t have an associated hotel) with ~100K+ sqft of casino floor space and 3K+ guest rooms (both metrics are the norm at MGM properties, vs. the exception in the portfolios of MGM’s peer operators) (On its 2Q22 call, management notes that 4 of the top 8 regional properties in the US (by GGR) are MGM properties).

Casinos - certainly casino-hotels and certainly premium properties - are generally reliable cash machines. MGM’s portfolio is no exception: prior to ceasing property-level disclosures in 2020, MGM’s Bellagio property generated $450-500M in annual property EBITDAR, MGM Grand LV $275-375M, and Mandalay Bay $230-270M. Similarly, MGM’s major regional properties are also locks for $200M in property EBITDAR, including MGM Grand Detroit ($175-200M), Borgata in Atlantic City, NJ ($200-210M), and MGM National Harbor in Maryland ($210-220M). Altogether, in pre-COVID 2019, MGM’s generated $1.6B in EBITDAR from LV assets and another $950M from its regional properties.

Post-COVID, the numbers have been eye-popping: on an LTM basis from 3Q22, MGM’s Strip properties have generated $3B in EBITDAR, with the regionals adding another $1.3B. Post-COVID, pent-up travel demand has burst forth on what is largely a fixed cost base, combined with a stripped-down expense structure from COVID that has lagged the massive influx of demand (indeed, management has noted the need to backfill labor given shortages relative to activity). EBITDAR% in MGM’s LV segment have been running in the 36-40% range for the last 6 quarters vs. 27-31% pre-COVID. Similarly, Regionals have been running in the 33-38% range for the last 6 quarters, vs. pre-COVID in the 25-28% range. While this has also coincided with the shift to an asset-light model (i.e., sale-leasebacks on the underlying real estate of MGM’s properties), the resulting ~$150M drop in D&A only accounts for ~160 bps of difference (CapEx is down ~$250M, which is ~260 bps tailwind)

The biggest questions concerning the value of the MGM’s domestic property portfolio are: a) to what degree top-line holds up against a weakening consumer spending and general economic environment; b) what’s the right margin level: pre-COVID? Post-COVID? Somewhere in-between?

As far as top-line, casinos – and LV in particular – have been around long enough that there are several well-established historical constants that can largely be relied upon. Chief among them is that people like to gamble – and will gamble – almost regardless of the economic situation. Going back 30 years, 2020/COVID is the outlier in terms of declines, with the recessions around the early-aughts and GFC resulting in material (4% and 17%) but manageable declines.

With the obvious caveat that history is not a guarantor of future performance, gambling activity is generally quite steady/reliable and more resistant to economic/consumer confidence pressures than one may assume. Moreover, the recent performance in LV is without the benefit of several tailwinds on the come. Most notable are international travel guests and group/convention business. Both have been laggards in LV’s post-COVID comeback but are starting to come back in recent months and should (at the very least) backfill any drop in the post-COVID general consumer euphoria, if not be additive. Both CZR and MGM have noted the comeback of both business channels on recent earnings calls and presentations (only now approaching 2019-ish levels), both of which are generally margin-additive business as well given the otherwise general deficiency in mid-week activity. This includes major events/conventions that either didn’t happen during COVID or were significantly diminished, such as CES, which is always a major LV-based convention in January and has been running at far less than optimal capacity over the past 2 years.

In addition, LV has been adding a meaningful amount of major sporting events to its calendar, which should drive increased traffic to LV on a comparative basis – e.g., Formula One has added the Las Vegas Grand Prix as a part of the 2023 Formula One World Championship, the NCAA Men’s Basketball Tournament West Regional games (Sweet 16 and Elite 8 rounds) and the entire NIT tournament will both be in LV, etc.

In general, there has been a clear effort by sports leagues/organizations to push LV as a location for major events and teams – this includes recent moves by the NFL’s Raiders and NHL’s Golden Knights, explicit statements from the NBA about expansion including an LV team, rumors that the MLB’s A’s are considering moving to LV, Las Vegas Bowl in NCAA Football now tied into the SEC and Big 10 conferences instead of Big West and Mid-American conferences, NFL Pro Bowl now being an LV event (vs. Hawaii), among others. In general, more events bring more people into town, which drives more hotel business, which drives more casino activity. The ultimate point being that even if post-COVID pent-up travel demand subsides, there are numerous factors that should keep LV traffic/activity at comparable or better levels than are currently being experienced post-COVID.

As far as margins, certainly the recent demand has pushed margins above normalized levels, by management’s own admission >90% occupancy rates have had a big hand in the outperformance. However, management believes there are real structural improvements that have been. Reasonable minds can debate what the right level is, but management believes that there are a few hundred basis points of structural improvement – both in LV and at regionals – which would put both LV and regionals comfortably >30% EBITDAR% on a regular basis.

Finally, property valuations are marked-to-market on a semi-regular basis, given very regular portfolio pruning/tweaking amongst operators on effectively an annual basis. The list of precedent transactions for individual properties is long and rich, but most deals end up in the HSD/LDD range of EBITDAR, generally far higher on EBITDA (i.e., subtracting out rent costs for a clean compare with owned real-estate deals). The Circus Circus Las Vegas – MGM’s smallest Strip property - was sold in 2019 for $825M, with its best EBITDAR year being ~$70M, but generally in the ~$60-65M range. MGM’s announced sale of the Gold Strike Tunica (expected to close imminently) was for $450M against 2016-2018 EBITDAR in the ~$50M range and a 2019 all-time high of $67M. Of course, The Mirage sale (also expected to close imminently) was for $1.1B, relative to 2019 EBITDAR of $154M. Just from the recent transactions alone, the range has run from ~7-12x EBITDAR, though notwithstanding the small sample size, typically LV Strip assets go for premiums vs. regionals (for intuitive reasons). Looking at typical EBITDAR trading valuations, LV Strip-focused operators have typically traded at 8-12x EBITDAR, while regionals have traded at mid-to-high single-digits.

Further, we’d note that GLPI Gaming and Leisure Properties Inc (NASDAQ: GLPI) and VICI Properties Inc (NYSE: VICI) – the two largest owners/lessors of gaming properties in the US – trade at 16x and 17x EBITDA, respectively.

At this juncture, it’s worth exploring MGM’s sale-leaseback arrangements.

As has been “in vogue” in recent years, MGM has taken full advantage of the sale-leaseback / OpCo-PropCo structure with their casino properties. Originally structuring it through a semi-owned vehicle (MGP), which was eventually merged with VICI (which was CZR’s version of the same thing), MGM has been able to generate $10.5B of proceeds from these transactions, which has gone toward acquisitions, debt reduction, buybacks, and general padding of the balance sheet.

The operating leases are effectively property-level debt, and they are all triple-net, so the capex requirements don’t disappear. That said, the operating lease structure is far superior than otherwise taking out “regular” debt, for multiple reasons:

1. First-and-foremost, it’s like debt in that it represents a liability and a regular, interest-equivalent payment, but the biggest monetary difference is the lack of principle payback, so it’s like a loan taken out in perpetuity.
2. Each lease is non-recourse and property-specific, so a “default” is contained within the property.
3. Each lease has fixed payments, granted with annual escalators (2-3%), but still fundamentally fixed.
4. There is no real other use for these properties, particularly in the regionals; from the perspective that a regional property that goes under is unlikely to be repurposed as anything (other than another casino, operated by an inferior operator to MGM) – regional assets are typically in the middle of nowhere (Atlantic City being a potential exception), so when they go under, the property (and surrounding area) are essentially abandoned.

While a Strip property would garner demand from other operators in the event of a rent default, who is going to be a better operator than MGM (they are considered the best operators in the market)? Is CZR or PENN going to be able to generate better EBITDA on the same property? Unlikely. Which means a default would be more likely due to a poorly constructed lease agreement / size, as opposed to fundamental business issues. More importantly, in the event of any trouble, the landlord would be highly-incentivized to restructure the lease to MGM’s advantage (what other options are there?).

The bottom line being that MGM has been provided with a massive influx in liquidity on fantastic terms and maximum flexibility, with an infinite payback time horizon for assets that have no other use.

MGM China Holdings (SEKH:2282) represents material value + optionality:

Primary points:

1. MGM China at basement valuation, still suffering from COVID-zero policies in the Far East.
2. Macau gaming license overhang has recently been removed.
3. Recent policy adjustments to normalize consumer activity create light at the end of the tunnel.

MGM holds a majority interest in 2 casino hotels in Macau, China – MGM Grand Macau and MGM Cotai. The properties are held within MGM China Holdings - a publicly traded entity (SEHK:2282) that is fully-consolidated in MGM’s financials. MGM’s China interests began as a 50/50 JV in the MGM Grand Macau but was eventually moved into a parent vehicle (MGM China Holdings), taken public in Hong Kong in 2011, and with an additional property added (Cotai) in 2018. Today, MGM controls 56% of the entity, with Pansy Ho (the original 50/50 JV partner) controlling 23%, and activist investor Sean Ma (Snow Lake Capital) with another 5%.

Macau has remained largely shut down due to China’s COVID-Zero mandate creating a drag on MGM’s EBITDA. Effectively, the policy in the region is to enact strict testing and lockdowns following any confirmed cases, so while casinos aren’t outright/indefinitely closed, they are opened in start/stop spurts at-best – see here for examples in July, August, and October.

MGM China produced EBITDA of $729M in 2019. Property-level disclosures show that starting 2011, the MGM Grand Macau generated $475-850M in EBITDA every year (2013-14 were particularly strong, with EBITDA >$800M; most other years, it was $500M +/- $30M). The recently opened MGM Cotai did $277M of EBITDA in 2019. Conversely, the aggregate of MGM China hasn’t done better than $41M in quarterly EBITDA since COVID and has been negative for more quarters than it’s been positive ($143M EBITDA loss over LTM). As such, the public valuation has suffered - just prior to COVID, MGM China traded in HK$13-15 range per share, vs. HK$4-6 over the course of the last year or so, until very recently.

By way of further background, another factor that weighs meaningfully on Macau casino ownership is that licensure is on relatively short terms (10-20 years) that need to get renewed, which can be a highly political process. There are currently 6 licenses in Macau (held by MGM, LVS, WYNN, MLCO, SEHK:0027, SEHK:0880), with licenses being up for award/renewal at the end of 2022. Given the political environment (several US-based holders on China’s turf) and a public bid by Genting Group to go after one of the 6 licenses with an over-the-top bid, the licensure issue has been an overhang for Macau gaming operators.

On November 26^th, Macau announced that all current casino license holders have been awarded 10-year license renewals, beginning January 1, removing a major overhang (indeed, it was the basis for Snow Lake Capital’s open letter to MGM and activist push).

Additionally, on December 8^th, Macau authorities announced a general relaxation on COVID restrictions (e.g., the ending of routine testing of mainland arrivals and no longer locking down entire buildings on confirmed cases). Macau’s change in stance followed relaxed policies coming from Beijing the day before, with the government expecting a sharp uptick in cases as a result, though at far more mild impact. Macau’s Secretary for Social Affairs and Culture was specifically quoted as saying that “the government will start to introduce the new measures so that the public can gradually adapt … the government will not relax all the measures at once.” The larger point here being that the Chinese (and Macau, by extension) authorities are publicly shifting gears to a COVID-tolerant policy that should keep the Macau casinos open and make it less annoying for people to visit said casinos, even if not happening all at once.

The combination of the two factors has caused shares of Macau-focused gaming companies to shoot up. At a basic level, MGM China Holdings publicly traded value is now at $4B, making MGM’s stake worth $2.25B or $6/share. A return to $750M+ in EBITDA could put the value of MGM China at 2x what it is today – where the stock was immediately prior to COVID – yielding an incremental $6/share to MGM.

BetMGM is a world-class asset (in the making):

Primary points:

1. US online gaming market is massive and coalescing around 4 primary players
2. iGaming supremacy is a much greater prize than sports – far larger and far more profitable
3. BetMGM is the clear leader in iGaming, both by share and by assets/quality of operation
4. Structural cost advantages vs. peers create greater margin potential and sooner profitability

As quick background, LSE:ENT and MGM announced BetMGM as a 50/50 JV in July 2018, with the basic idea being that LSE:ENT is one of the top online operators on the planet (with arguably the best tech stack, originally acquired in the 2015 deal for Bwin) and MGM has a big brand, broad day-1 market access, and a large database of loyalty members and bettor profiles in the US. The tie-up wasn’t out of nowhere – MGM had worked with both Bwin and LSE:ENT previously (iGaming had been legalized in NJ in 2013 and MGM had been the license-provider for Party Poker and Party Casino, among other things).

The basic structure of the JV has both parties with equal ownership and both parties providing exclusive rights in the US for the relevant contributed assets, subject to an initial 25-year term. There's also a right-of-first-offer from one partner if the other partner wants to exit the JV (after which, that first offer can be shopped). The primary contributed assets from MGM include economics of US retail sportsbooks (existing and future at MGM casinos), all US gaming licenses, including all skins for online sports betting (OSB) and iGaming, MGM’s market access agreement with BYD (that essentially provides market access via both MGM and BYD sites/licenses), and MGM’s M-Life Reward loyalty database. LSE:ENT’s contributed assets include the technology stack, the sportsbook operations (sportsbooks are very people-intensive and operate very similarly to securities trading desks), and the PartyPoker and Party Gaming brands.

While DKNG and FanDuel (owned by LSE:FLTR) get most of the publicity, we believe BetMGM will become the best online gaming asset in the US and, given the size of the US market, potentially in the world. The short version why is BetMGM’s strength in iGaming (which is a far larger and more profitable market than OSB), combined with “enough” strength in OSB, and a more profitable operation than peers – both structurally and practically.

The first aspect to understand is the material difference in the iGaming and OSB opportunities and the relative strength of the primary operators in those arenas. Currently, 23 states/territories have legalized OSB (AZ, CO, CT, DE, DC, IL, IN, IA, KS, LA, MD, MI, NV, NH, NJ, NY, OR, PA, RI, TN, VA, WV, WY), with several more launching in 2023 (MA, ME, PR). Conversely, only 6 have legalized iGaming (NJ, PA, MI, WV, CT, DE) – a big challenge in legalization has been pushback from Native American casinos and other land-based casino operators that don’t have digital capabilities and thus stand to lose share of total “wagering appetite” to online operators.

However, at legal parity, iGaming market is far larger, structurally more profitable, lower risk, and more linear/stable than OSB, by orders of magnitude. Based on monthly state disclosures, the states with overlapping OSB/iGaming legalization (excluding DE, who is immaterial) have shown an average of 2.5-2.7x greater iGaming win (i.e., wagers less payouts) vs. OSB on a rolling 12-month basis (i.e., adjusting for the seasonal swings in OSB activity). On handle (i.e., total wagers), the delta is significantly more – NJ and MI don’t disclose total iGaming handle, but the aggregate of CT, PA, and WV iGaming wagers run ~7x the size of OSB wagers on a rolling 12-month basis, with the implied difference being the operator win rates on iGaming are far lower than OSB (for now, at least).

Indeed, iGaming win rates have considerable upside – win rates in iGaming legal states have generally run around ~3%, which is below land-based casino slots win rates (~5-7%) and table games win rates (~20%), suggesting more advanced gaming (live dealer?) and/or market maturity could see operator win rates rise to more typical casino levels.

Even without that upside, the >2.5x iGaming-to-OSB win ratio would suggest >$14B in iGaming win being in-play today if iGaming were at full legal parity with OSB, based on OSB win (i.e., gross gaming revenue, or GGR) for the LTM ended Sep-2022 of $5.7B, which enjoys zero contribution from KS and MD and only partial contribution from LA and NY. Of course, major states like CA, FL, and TX haven’t legalized anything yet. All this suggests that the iGaming GGR opportunity at full legalization could easily hit $30B+.

The beauty of iGaming vs. OSB, beyond absolute market size, is that it entails no risk or seasonality (sportsbooks are highly seasonal around major sporting events and seasons, while also being exposed to book liability as most books aren’t perfectly hedged/matched) – indeed, iGaming wagering and win rates based on monthly state disclosures are highly stable month-to-month. Moreover, sportsbooks require significant human capital in trading (odds making) and risk (odds adjusting, liability management), whereas iGaming is pure software, and thus iGaming generally enjoys EBITDA% >30%.

With the caveat that the current iGaming market is only 6 states large, and the state data is limited on operator-specific disclosures, BetMGM has taken commanding share of the iGaming market. In NJ and MI, BetMGM’s share is clearly identifiable and has been rising from the earlier days of BetMGM’s launch to the current steady level of ~1/3 of the market. In PA and WV, BetMGM shares its gaming license with other operators (RSI in PA, FanDuel in WV), with BetMGM’s shared license accounting for ~43% share in those states. Market share reports (often quoted by MGM and LSE:ENT) peg BetMGM as top market share holder in iGaming, which directionally confirms the state data. BetMGM’s iGaming success makes intuitive sense– as noted, LSE:ENT is one of the global online gaming leaders (along with Bet365 and LSE:FLTR) and, until LSE:FLTR’s acquisition of The Stars Group (TSG) in 2020, was the world’s largest iGaming operator. LSE:ENT’s iGaming operation armed with MGM’s brand and applied to its customer database makes for a potent combination.

While it’s still early days, the market – in both iGaming and OSB – has been coalescing around a few players, which follows the history of online gaming abroad and makes intuitive sense given the fixed cost investments required to maintain a competitive operation, as well as the structural advantages afforded to those who achieve scale. In both OSB and iGaming, the main players nationally are FanDuel, DKNG, BetMGM, and CZR, with some regional strength from PENN and RSI (i.e., PENN and RSI are top-4 players in select markets, but not nationally). When combining the existing iGaming market, the total online gaming market arguably drops to 3 relevant players, given CZR’s relative lagging in iGaming thus far.

For perspective, on the OSB side, a 7-state sample of AZ, CT, IL, IN, MI, NY, and PA (markets that have clean operator-specific OSB disclosures) accounts for ~60% of the total current US addressable GGR. In that sample, YTD share among those 4 primary operators comprises 86% of the market, with LSE:FLTR tops at ~43%, DKNG second at 24%, BetMGM third at 12% and CZR fourth at 8%. Further, market share actually overrates the relative strength of LSE:FLTR and DKNG to BetMGM and CZR given the minimal OSB licensees in CT (BetMGM and CZR aren’t there) and when viewed through the prism of after-tax proceeds given the aggressive approach of FanDuel and DKNG in NY, where the top-line numbers are massive but the onerous taxes make the state effectively unprofitable (i.e., its empty GGR). Further, what has started out as a crowded OSB market is starting to consolidate, with more rational promotional activity likely to accrue benefit to BetMGM and CZR (and PENN and RSI) given the heavy use of promotions by DKNG and FanDuel to build their market share and the relative benefits of omnichannel marketing (e.g., the rewards/loyalty programs of MGM, CZR, PENN, and RSI) as a customer acquisition/retention tool when users aren’t being bought with thousands of dollars in free bets.

Either way, there is a clear top-4 in the OSB market. As noted above, the iGaming market share is far harder to cleanly parse out among operators, but even with the messiness of shared licenses, it’s clear that BetMGM, LSE:FLTR, and DKNG are the main players and effectively comprise >75% of the market. Certainly, there is a degree of theoretics here given iGaming legalization has to happen for all these benefits to accrue. But if we assume, over the long-term, legal parity with OSB, the currently and soon-to-be legal states would likely combine to form a ~$40B market, with the top-3 players owning ~75%. Given BetMGM’s relative strength in the more profitable iGaming side of the market, BetMGM could easily be the EBITDA share leader.

This brings us to profitability. Other than DKNG, the other major operators have all noted intentions of breakeven or profitability occurring in 2023. The remarkable aspect is that FanDuel and DKNG are currently far larger than others on total revenue scale - BetMGM is expected to generate $1.3B in revenue this year vs. DKNG at ~$2B and FanDuel at ~$3B. This jives with both the idea that OSB is far less profitable than iGaming (wherein both FanDuel and DKNG derive majority of their revenue from OSB), as well as the structural cost benefits of vertically-integrated (read: in-house tech stack) omnichannel operators (read: those tied in with land-based casinos). Indeed, the current structure of the BetMGM JV effectively amortizes the technology cost across the entirety of LSE:ENT + BetMGM, which is an advantage only LSE:FLTR can mimic, but with the disadvantage of no land-based efficiencies (read: cross-channel marketing + market access costs) and a less efficient tech stack vs. BetMGM (LSE:FLTR’s many acquisitions have resulted in an amalgamation of technologies, vs. the cleaner LSE:ENT back-end, which has been standardized on the Bwin platform since that acquisition).

Indeed, state level data from New Jersey and Michigan show MGM (and some other operators) already operating at >30% EBITDA margins. MGM will generate >$300mm of contribution profit from NJ & MI in 2023.

Certainly, BetMGM doesn’t have to be THE best, but rather one of the best, to accrue considerable value to MGM shareholders, though how much more so if they end up as the flagship asset in the market. In Europe, the top online gaming operators have typically traded at >10x EBITDA, with lower-quality operators in the mid/high single-digits. With high incremental margins once hitting breakeven, BetMGM should be able to achieve $1B in EBITDA at a $4B rev level, if not sooner. Given new state openings and the sustained growth levels of more mature states, BetMGM could hit this level as early as 2025 – OSB should be a $10B+ GGR market for full-year 2024 and iGaming legalization in IA, IN, IL, and NY could certainly happen by then, which would put BetMGM in the $3-4B range for rev in 2025 if market share levels hold. This equates to a $10B+ asset, of which $5B would accrue to MGM shareholders, with further upside as legalization and market rationality continue to move forward.

Key Risks / Negatives / Bear Case

1. The domestic portfolio faces risk from several avenues, including a return to pre-COVID margins (i.e., all gains were fake/temporary and margins are coming back down hard), a downshift in discretionary spending (economy, inflation, etc.), iGaming cannibalization of wallet share (particularly in regionals), and potential for a downshift in Atlantic City (read: Borgata) from downstate NY casinos.
2. MGM China is fraught with risk – for starters, the geopolitics makes everything difficult to handicap. Certainly, COVID policies in the region aren’t being rolled back overnight. More troublesome is the rumblings of Macau wagering volume being meaningfully overrated and unsustainable as a result of being a channel for money laundering and otherwise “getting one’s money out of China”, which the Chinese government has cracked down on, coincidentally with COVID. This would potentially imply a lower terminal value for Macau gaming in general and MGM China. In addition, the 10-year license recently granted is shorter than the original 20-year, which may be nothing to worry about, but also might be something to worry about. Frankly, the most comfortable move would be for MGM to cash out of China entirely at a reasonable valuation as things return to normal over there, reinvesting the proceeds in the NY and Japan projects and the digital roll-up strategy.
3. BetMGM’s advantage largely stems from iGaming, which has legalization hurdles, potentially pushing out the timeline for bull case. In addition, a more robust legal iGaming market will likely have a few more aggressive entrants (CZR, PENN) for strategic an existential reasons that could skew the market share or profitability assumptions in the wrong direction for BetMGM.

Catalysts / Accelerators / Positive Checkpoints

• Sustained margin gains through 2023
• BetMGM profitability (2023)
• iGaming legalization anywhere
• Acquisition/merger of LSE:ENT
• Continued buybacks at attractive valuations
• Normalization of Macau traffic / wagering activity
• Any potential monetization of Macau assets
• Further accretive international digital deals

Catalyst

See above