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The casino sector has some M&A speculation percolating after a long cool stretch for deals amid higher interest rates and macroeconomic concerns. Major deals have been few and far between since Blackstone Real Estate Income Trust’s (OTCPK:BSTT) purchase of the Aria Resort and Vdara Hotel and Spa from MGM Resorts International (MGM), Hard Rock Cafe International’s purchase of The Mirage Hotel, and the deal that saw the Venetian Resort Las Vegas move into the hands of Apollo Global Management (APO) and VICI Properties (VICI).
For the first time since those major deals, there is some M&A buzz. Rush Street Interactive (RSI) jumped in late afternoon trading on Thursday after Bloomberg reported the company is exploring a potential sale. Sources indicated that the list of potential buyers that have been approached included DraftKings (DKNG). Neither Rush Street (RSI) or DraftKings (DKNG) has issued a specific comment on the report. Weighing in on the development, JMP Securities analyst Jordan Bender said the firm believes Rush Street (RSI) would make a strategic fit for several companies in the gaming space at the right price. He noted the report of a sale arrived at a time when the company is on a path to grow EBITDA on a positive trajectory. Bender discounted DraftKings (DKNG) making a run at RSI since it has historically used equity in M&A, which is seen as a potential friction point with controlling shareholders. Caesars Entertainment (CZR) and Hard Rock International are seen as more likely acquirers.
The tea leaves are also suggesting something could be afoot with MGM Resorts International (MGM) as several developments point to more dry powder. Across the Pacific, MGM China Holdings (OTCPK:MCHVF) (OTCPK:MCHVY) recently had its credit outlook updated to Stable from Negative’ by Moody’s after showing sustained improvement in Macau. However, Moody’s also warned that parent MGM Resorts (MGM) credit rating was constrained by the company’s high leverage, including the company’s sizeable leases on the balance sheet. The upshot was that Moody’s expects MGM (MGM) will actively pursue large integrated resort development projects or deals that will result in elevated leverage for some time.
Of interest, MGM China Holdings (OTCPK:MCHVF) stated last week that a $750M revolving loan facility made available by MGM Resorts International (MGM) during the pandemic is not commercially necessary anymore. MGM Resorts International (MGM) could be also be looking to sell some of its casino assets once again. Sources tipped to Bloomberg that the casino resort operator is exploring the sale of casino operations at Ohio’s Northfield Park horse track and in Springfield, Massachusetts. The company is working with financial advisers, although the discussions were described as preliminary in nature.
CBRE Equity Research analyst John DeCree highlighted that there is constant speculation on MGM (MGM) pursuing large-scale M&A in the digital space, namely through its BetMGM joint venture with Entain (OTCPK:GMVHF). “While ultimately collapsing the US JV would seemingly make sense, MGM has more recently pointed its laser on filling a specific gap in sports betting technology,” he observed. DeCree thinks MGM should be setting its sights on a larger tech provider if it intends to scale its international platform. Another option for MGM Resorts (MGM) could be asset trading. The sale of two regional assets could be a capital raise in front of larger M&A plans or to just to make way for expansion in Japan, New York, and potentially the United Arab Emirates.
Even if M&A activity does not pick up, there could be some sector-rattling moves down the road, similar to the splashy play by Disney’s (DIS) ESPN to get into sports betting by partnering with Penn Entertainment (PENN). Several analysts have been buzzing over social media sites as potential gaming partners for established players.
Sector check: The casino stocks with the best year-to-date returns so far are Wynn Resorts (WYNN) +10%, Studio City International (MSC) +8%, and Red Rock Resorts (RRR) +7%. The casino-related stocks with the strongest Seeking Alpha Quant Ratings are Light & Wonder (LNW), Red Rock Resorts (RRR), Sportradar (SRAD), and Bragg Gaming (BRAG). In terms of profitability, the standouts are Las Vegas Sands (LVS), Boyd Gaming (BYD), and Monarch Casino & Resort (MCRI). On the sports betting side of the business, Flutter Entertainment’s (FLUT) FanDuel was the first U.S. operator to report a profit on an adjusted basis.
