Eminence Capital, a New York-based investment firm, has published an open letter to Entain’s Board of Directors conveying its displeasure at the gambling giant’s proposed acquisition of STS Holdings.
Currently, Eminence has circa 13.2 million shares in Entain, around 2% of the total outstanding – the first of which it accrued in 2020.
The letter acts as a scathing rebuke of Entain’s move to buy STS, describing STS itself as an ‘at best nice to have,’ highlighting that it believes Entain is acting illogically by pursuing the deal that values STC at 12xEBITDA – while issuing Entain stock at 7xEBITDA.
Furthermore, Eminence goes on to say Entain’s stock has dropped by more than 8%, losing £650m ($830m) in market value – which is similar to the amount being paid for STS.
The letter contains several direct shots at Entain’s Board for backing the acquisition, describing it as ‘tone deaf’ and stating ‘the management either doesn’t understand finance or, worse, that they believe the company’s shareholders are naïve.’
While we can support the company pursuing seemingly rational acquisitions, funding them with highly undervalued equity is an empire building, shareholder value-destroying strategy
The investment firm does, however, say that it backs mergers and acquisitions (M&A) in general – spotlighting Entain’s potential divesture of its stake with BetMGM, saying it was part of ‘multiple attractive and value-creating paths exist for Entain to raise capital to fund its M&A initiatives.’
However, in the case of STS, Eminence goes on to state, ‘while we can support the company pursuing seemingly rational acquisitions, funding them with highly undervalued equity is an empire-building, shareholder value-destroying strategy.’
Finally, Eminence attacks Entain for purchasing a company while roundly rejecting takeover bids from other companies, such as MGM, at ‘materially higher prices.’
Warning that '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.’
The letter – signed by Eminence CEO/CIO Ricky Sandler – is an astonishing and very public attack on Entain’s leadership, that comes with a dire warning for the Board and its C-level executives – in essence stating, stop the deal or this is going to get ugly for all involved.
