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American holding company IAC announced on Monday that it has been buying up shares of MGM Resorts International over a period of a few months. In total, it has sunk roughly $1 billion into acquiring 59 million shares at an average price of around $17.25. That equates to a 12% interest in the company.
It is a big investment for IAC, whose own market capitalization is just over $12 billion at the moment. It also marks a bit of a departure from the company’s usual wheelhouse. Founded in 1996, IAC has built its empire mostly on the shoulders of internet media and services companies.
According to IAC’s chairman, billionaire business mogul Barry Diller, the company has been looking for a while now for an opportunity to enter the US online gambling space, but hadn’t found any appealing opportunities among other companies operating there.
IAC also had $3.9 billion in cash on hand and no debt, following its separation from Match Group. Match, which comprises a number of online dating brands, had been one of IAC’s early success stories.
With only a minority share of the company, even a very significant one, IAC has no direct control over what MGM does in the online space. However, CEO Joey Levin said that IAC will be “a long-term strategic partner, and would welcome the opportunity to contribute to MGM’s success in any way” that the latter’s board sees fit.
As it turns out, that will likely include one or more positions on MGM’s own board.
“We could not be more excited to welcome IAC and Mr. Diller as an investor in MGM Resorts,” said MGM board chairman Paul Salem, responding to the news. “We welcome IAC as a long-term strategic partner and intend to invite them to join our Board of Directors.”
The announcement of the investment includes an open letter from IAC to its shareholders. In it, Diller and Levin acknowledge that it may seem like a strange move, but go on to explain IAC’s rationale.
IAC describes its business philosophy as “financially-disciplined opportunism.” Both halves of that phrase apply to the logic behind the investment.
At the moment, online gambling is only a tiny portion of MGM’s overall business. The letter describes it as “a portion of its revenue so small that it rounds down to zero,” when compared to its land-based hotels and casinos. That’s part of what IAC finds so appealing. It offers huge potential for future growth, yet isn’t fully factored into its current valuation.
Meanwhile, MGM’s stock is trading at a heavily reduced price at the moment due to the impacts of COVID-19. IAC believes it is still in a better position on that front than most of its competitors and will rebound strongly.
“The current pandemic brought revenue (though not expenses) to a temporary halt,” explains the letter, “and required MGM to repurpose cash it had wisely stockpiled for share repurchases to instead defend the solvency of the company. The good news is, we believe MGM has enough cash and access to capital to make it to the other side competitively stronger.”
The letter also points to MGM’s well-managed subsidiaries as evidence of it being a financially prudent investment.
IAC sees MGM’s land-based focus as an eventual asset to its expansion into the online space, rather than a hindrance. In part, this is because the norm so far in the US has been for states to require online gambling to be conducted in partnership with a land-based casino.
All five states with legal online casinos use some variation of that arrangement. So do many states with online sports betting. As new states pass their own iGaming bills, they will likely follow suit as well.
Because MGM has a casino in New Jersey (the Borgata) but not Pennsylvania, this has slowed its growth in the early going. It will enter the Pennsylvania market as a qualified gaming entity, but will be among the last arrivals. Conversely, it should be among the first off the ground when Michigan online casinos launch, thanks to the MGM Grand Detroit.
IAC also describes MGM as an “aspirational brand.” Its casino and hotel properties are all high-end. Similarly, the MGM Grand Garden Arena hosts numerous high-profile sports and music events on the Las Vegas Strip. IAC hopes that some of that glamor and reputation will transfer to its online products and help differentiate them.
To stress this point, Diller and Levin made a somewhat unusual comparison. They see similarities between MGM’s entry into the online space, and Disney’s launch of its Disney Plus streaming service.
“Similar to Disney’s advantages over pure-play streaming companies with an iconic brand and multiple avenues to monetize the same intellectual property between streaming, theatrical releases, merchandise, and theme parks, we believe MGM also is an aspirational brand,” they wrote in the shareholder letter, “which could be delivered with daily accessibility and offer gaming consumers (including the 34 million M-life Rewards members) a wider range of services, both physical and digital, than any competitor.”
IAC has had a pretty good track record with its investments over the years. Its own share prices have experienced considerable volatility since the beginning of the COVID-19 pandemic, but had grown more than tenfold from the beginning of 2010 to the start of the crisis.
Aside from Match Group, it has managed to get in on the ground floor with several prominent brands over the years. Its acquisitions and investments have included the likes of:
All of these operate in very different industries than MGM, yet they’ve all become familiar brands under IAC’s watch.
MGM investors were understandably happy to hear that the company had received IAC’s verbal and financial blessings. Its stock traded up nearly 14% on Monday, closing at $21.65. That’s roughly where its price was at the beginning of March, though it briefly reached a higher price in early June as its casinos began reopening, peaking at $23.76.
IAC’s shareholders seemed more bemused by the announcement. Its shares jumped a little at first, then quickly dropped, before a late-day rally brought them back close to where they began. At close, they were trading at $131.27, a loss of just 1.3% on the day.