American media and technology company IAC has acquired a 12 percent interest in global hospitality and entertainment giant MGM Resorts International for an aggregate of approximately $1 billion. “We will be a minority investor and a long-term strategic partner, and would welcome the opportunity to contribute to MGM's success in any way that MGM's Board would look favorably on our involvement,” IAC CEO Joey Levin said in announcing the deal.
“With the separation of Match Group from IAC, and ‘new’ IAC emerging with $3.9 billion of cash, no debt, and its opportunistic zeal intact, we are energized and excited to make this investment in MGM,” said Barry Diller, chairman and senior executive of IAC. “What initially attracted us to MGM—besides its leadership in leisure, hospitality and gaming—was an area that currently comprises a tiny portion of its revenue: online gaming. IAC's foundational concept of seeking opportunities to build interactive businesses is our base rationale—there is a digital-first opportunity within MGM Resorts' already impressive offline businesses, and with our experience we hope we can strongly contribute to the growth of online gaming.”
MGM's Appeal
In a letter to its shareholders outlining the rationale for its investment, IAC leadership acknowledged that the deal could seem surprising. “First, we accumulated a large minority position in a public company, which is not our usual methodology. Second, the securities we purchased are common equity securities, the exact same securities that any investor with exactly $19 could buy and sell any day in the market. Third, we bought securities in a business that has relatively little to do with the Internet today. Fourth, we invested a portion of our cash in a new direction for IAC.
“The answer to all four of those concerns is that we believe MGM presented a ‘once in a decade’ opportunity for IAC to own a meaningful piece of a preeminent brand in a large category with great potential to move online. IAC has always been opportunistic with its capital, and if ever there was a time, this moment is unique. We believe we can generate compelling returns for our shareholders and hope our expertise will be additive to MGM's opportunities, but even if we never advance our involvement from here, the value was too compelling to ignore. Having taken this step, we have a very long-term view of this investment and will be open to all the opportunities it presents along the way.”
While IAC’s main interest is in MGM’s online gaming potential, the holding company is also aware of its hospitality dealings, particularly its dominance in Las Vegas. “When the world returns to normal, MGM will be just as capable post-pandemic as it was pre-pandemic in servicing visitors in over 35 percent of the Las Vegas Strip's available rooms, plus eight regional properties across the U.S., two in Macau, and hopefully in Japan,” the letter said. “The 34 million members of MGM's loyalty program still have their M-life Rewards, and we're confident that many are eager to return to the properties they love. And when Las Vegas fully re-opens—even if it must wait until a vaccine for that to occur—we expect it to roar back: a new NFL team, a new stadium, a drivable destination and months of pent-up demand could drive a powerful resurgence.”
The letter also explained that MGM has a $2.5 billion EBITDAR (earnings before interest, taxes, depreciation, amortization and restructuring or rent costs—a gaming industry metric that reflects profitability and simplifies comparisons between operators that own real estate and those that do not) operation domestically that comes alongside the opportunity in digital sports betting and table games, at a normalized free cash flow yield over 10 percent.
“Over the next decade, free cash flow at MGM could be in excess of its current valuation, and we believe the business will have ample opportunities to invest that capital,” the letter continued. ”If nothing else, of course, our ownership will steadily accrete up if MGM continues to use that free cash flow to shrink its capital base. Regardless of how MGM chooses to put its cash flow to work, the power of that cash flow doesn't appear to be getting much value in the market, and we believe that those financial dynamics—on top of all the other positives—make this investment and its potential return every bit as worthy as other opportunities we may have to deploy our capital.”
The New Partnership
MGM, in turn, welcomed the investment. “Mr. Diller and Joey Levin ... bring vast experience in both entertainment and online commerce and we will take full advantage of their experience," said Paul Salem, MGM Resorts chairman of the board of directors. “IAC's family of brands and digital expertise are a great complement to the direction MGM Resorts has been taking both in leveraging our digital assets to enhance our guests' experience and building a leading iGaming and sports betting business in BetMGM. We welcome IAC as a long-term strategic partner and intend to invite them to join our Board of Directors.”
“IAC's expertise in growing and expanding brands online is a natural fit for our focus on enhancing the resort experience through curated and personalized offerings, as well as digital enhancements in sports betting and online gaming,” said CEO and President Bill Hornbuckle. “We appreciate that they share our long-term strategic vision for growth and maximizing value for our shareholders. We welcome their collaboration and are excited at the possibilities it will bring.”