DraftKings target Entain yet to answer £100m question

The board of Entain (ENT) is yet to decide whether to return around £100m in furlough support to the taxpayer, the Investors’ Chronicle has learned, despite a step-change in the bookmaker’s profitability in the past year that culminated in last month’s $25bn (£18.4bn) potential bid for the group.

Company disclosures and government data show Entain, formerly known as GVC, has been one of the largest claimants of any UK-listed company. The furlough scheme ended last week having provided around £70bn toward the salaries of employees unable to work during the pandemic.

In March, Entain finance director Rob Wood described the Coronavirus Job Retention Scheme as “very positive” and said it had enabled the group “to keep many, many thousands of people in employment” who otherwise would have been let go.

The company faced a cliff-edge in earnings visibility in the first quarter of 2020, amid the cancellation of live sports and closure of non-essential retail. This was compounded by a dearth of liquidity and a stretched balance sheet after years of acquisition-led growth. Entain’s share price dived to 324p on 19 March 2020, since when it has climbed almost eight-fold.

This April, Wood told analysts that repayment was “under review”, as a raft of companies in the sector and elsewhere announced plans to return funds claimed at the nadir of the pandemic.

At the time, Entain was still claiming furlough support on behalf of workers in its large high street operations, which includes the branches of the Ladbrokes and Coral bookmakers. Government data shows these receipts were at least £35m, and as much as £85m in the first four months of 2021. In 2020, the group claimed a total of £62.9m in furlough support, largely in the UK and Republic of Ireland.

But six months on – during which time Entain has upgraded profit forecasts, made a €150m (£128m) acquisition and agreed terms on another $75m deal, increased its liquidity, and signalled the resumption of dividends for 2021 – the board is understood to still be debating whether to repay furlough monies. Entain declined to comment.

Entain has remained profitable at a statutory level throughout the pandemic and posted a pre-tax profit of £175m in 2020. In July, it raised its cash profit guidance for the current year to between £850m and £900m. Analysts now expect net income to more than triple to £329m for 2021, amid an explosion in online gambling in both the US and Europe in the past year.

Beyond its revived fortunes, the company’s ongoing internal debate about furlough repayments also contrasts with the actions of close peers and other UK blue chips.

FTSE 100 peer Flutter Entertainment (FLTR) decided against claiming furlough last year, despite being forced to close its Paddy Power stores during lockdowns. William Hill, whose European operations are being acquired by bookmaker 888 (888), repaid the £24.5m it took in furlough in March after strong performances in its online and retail divisions.

Despite being badly hit by blanket retail closures, Primark-owner Associated British Foods (ABF) decided to refund the £121m-worth of employee support it had claimed after returning to positive cash generation earlier this year. Companies including Kingfisher (KGF) and Howden Joinery (HWDN) were also quick to refund the state last autumn, following improvements in online trading.

Though employers are not obliged to repay furlough, the treasury said last year that it expected all large employers to renounce dividend payments when using the support scheme. The resumption of shareholder distributions is likely to be a key consideration for the board in its internal debate over furlough.

The decision also has implications for DraftKings (US:DKNG), the US sports betting firm which last month tabled a non-binding £28-per-share offer for the company.

Entain plans to “carefully consider” the bid, which comprises 630p in cash and the rest in Draftkings ‘A’ shares. An additional £100m cash injection would notionally be worth an extra 17p per share, assuming Draftkings has not factored in furlough repayment to its deal. DraftKings did not respond to a request for comment.

Investor hopes for the deal have soured in recent weeks after MGM Resorts International (US:MGM) – which made an unsuccessful bid for the UK group earlier this year – said the terms of its exclusive US joint venture with Entain mean it would need to consent to any transaction “whereby Entain or its affiliates would own a competing business in the US”. Analysts have suggested this could still result in an agreement between the parties, ahead of a 19 October deadline of a formal offer from DraftKings.

Those discussions and the terms of any deal will give far greater weight to synergies and fevered growth projections for the US market than any decision on furlough repayments. Still, Entain shareholders, DraftKings and the UK treasury would all be better served by a bit more boardroom decisiveness. Hold at 2,138p.

Last IC View: Hold, 2,348p, 21 Sep 2021