Maximizing Returns Through Gaming Investments: Why IAC Favors MGM Over Other Deals

Diller’s company owns 23% of MGM shares
IAC has mulled other gaming investments, says an analyst

Barry Diller’s IAC/InterActiveCorp (NASDAQ: IAC) continues to view its 23% stake in MGM Resorts International (NYSE: MGM) as a “forever asset.” However, it hasn’t stopped exploring other potential gaming investments.

Gaming business — Image by WOKANDAPIX from Pixabay

This information comes from a report by Truist Securities analyst Youssef Squali, after he recently met with CFO/COO Christopher Halpin and Vice President Mark Schneider in New York. The analysis highlights that IAC is still proactively involved with MGM, with both Diller and former IAC CEO Joey Levin serving on MGM’s board of directors. However, this has not limited IAC’s interest in assessing other deals within the gaming sector.

Squali stated, “Aside from advising MGM, IAC has explored deals within the real money gaming industry.” He went on to say that while IAC consults about potential mergers and acquisitions with MGM, there is no exclusive deal in place between IAC and MGM. It’s also notable that IAC holds valuable gaming licenses, creating a significant barrier for new entrants into the market.

While specific mentions of other gaming companies IAC is considering for investment weren’t disclosed, IAC has a well-established history of acquiring stakes in and revitalising internet-based businesses. This could mean they are focusing on areas such as iGaming or online sports betting when evaluating viable new investments in the gaming industry.

IAC Still Views MGM as Undervalued

IAC first acquired a 12% share in MGM, worth about $1 billion, in August 2020. As a result of additional acquisitions and the reduction of MGM’s public share availability through buybacks, IAC’s ownership has almost doubled since then.

Despite their considerable involvement, IAC has skilfully maintained a position that blends activist and passive investment strategies within MGM. They have worked on improving the operational efficiency of BetMGM—an effort that is expected to yield positive earnings before interest, taxes, depreciation, and amortisation (EBITDA) for 2025.

Yet, IAC has refrained from overtly urging MGM to pursue transformative actions or shake up its leadership team, which is often a hallmark of traditional activist investor behaviour. However, they contend that MGM’s stock remains undervalued.

According to the analyst, “While IAC’s cost basis for MGM stock is $19 and the shares are currently trading above $31, the belief within management is that MGM continues to be grossly undervalued, trading at 3.5x EBITDA when considering BetMGM along with MGM China.”

IAC: A Credible Alternative to Owning MGM

IAC may serve as a “synthetic” way for investors to hold MGM stock. Squali emphasises that investors frequently question the merits of owning IAC over directly possessing MGM shares.

“Here, we believe that ownership of IAC provides investors with an attractive cost basis for investing in MGM (at $19/share), while also offering exposure to the rest of IAC’s portfolio and a commitment to shareholder-friendly capital allocation,” concludes the analyst.

It’s plausible that IAC may increase its stake in MGM in the coming months. Earlier this year, Diller indicated that this was a potential scenario on the horizon.

In summary, Barry Diller’s IAC remains a fervent supporter of MGM Resorts, holding a significant share while also keeping an eye on new opportunities in the gaming industry. With its track record of strategic investments, IAC stands poised to be a significant player in shaping the future of the gaming landscape.