Back in late June, Fertitta Entertainment announced plans to spin off Golden Nugget Online Gaming from Landry’s land-based casino operation. The standalone entity (to be rebranded GNOG) will become just the second publicly traded, pure-play online casino in the U.S., following a reverse merger with Landcadia II Holdings (a SPAC co-sponsored by Tillman Fertitta and Jefferies Financial Group). But a pair of industry authorities—Sara Slane (Founder, Slane Advisory) and David Van Egmond (CEO, Bettor Capital)—say that given the robust valuations held by DraftKings and GAN Limited (the two publicly traded pure-play sports betting companies) and the need for capital to compete in a crowded space, the online casino and sports betting sector could see a few other public listings over the last five months of 2020 (and several more over the next few years). It should be noted that Sportico recently reported Sportradar (a data & integrity-monitoring outfit) is “exploring plans to go public” (also via a SPAC).
Our Take: The Golden Nugget Online Gaming–Lancadia II Holdings (LCAHU) deal assessed the combined entity at an anticipated pro forma enterprise value of $745 million (or 6.1x projected 2021 revenue). While that’s a rich number for a company doing business in just a single state—even if they are the “unquestioned” online casino market leader in New Jersey—it didn’t spook investors excited by the opportunity to invest in a pure-play gaming company. LCAHU shares are up +55% since news of the reverse merger broke.
The “froth and enthusiasm” around LCAHU isn’t particularly surprising considering “the overarching sports betting and online gaming market opportunity.” Van Egmond explained that “whether [that number is] $20 billion, $30 billion, $40 billion or $50 billion across sports betting and online casino—people are excited to invest against [the TAM] for the next five or 10 years as it plays itself out.” It’s worth pointing out that the industry remains in its relative infancy. The combined market today is ‘just’ +/- $3 billion.
Van Egmond is confident when the U.S. has 30 states with legalized online sports betting that the TAM projections will be close to accurate. While one could argue the limited number of online casino businesses (it’s currently only legal in four states) would indicate a shortfall of that milestone [is on the horizon], Slane explained that “sports betting is the camel’s nose under the tent for internet casino gaming. If you look at the numbers coming out of New Jersey and Pennsylvania, they’re huge.”
The sports betting and online casino space is “highly competitive and requires a lot of capital” (think: marketing, state licensing and technological innovation), so it reasons that participants serious about capturing market share are going to need money. While some may be able to go the private route, Slane said she believes public listings within the space are “going to become a trend.” Internet gaming in the U.S. is considered among the last frontiers (at least within global sports betting and online casino business), and with so few publicly traded companies for investors to back in the space, pure-play operators are able to command a scarcity premium from the public markets. One must look further than Score Media & Gaming for evidence. Van Egmond said, “In the last three reported months (period ending Jan. 30), The Score did negative sports betting revenue and yet investors remain hungry.” Shares are up +137.5% since the beginning of the sports hiatus. It should also be mentioned that there are some regulatory and licensing benefits to being a publicly traded gaming operator.
With the wind at the back of the U.S. gaming industry, it seems likely that privately held companies in the space will turn to the public markets for capital (particularly as the industry continues to mature). Publicly traded, brick-and-mortar heavy operators will also likely consider spinning off interactive divisions to unlock value. Van Egmond said that’s because “the bigger public side investors are no longer doing late-stage growth equity or private deals in tech—at least not to the same extent they were [a decade ago].” He noted the vast majority of casino operators “maintain so much retail exposure that online is just a small portion of their business today.”
It’s not a coincidence that DraftKings, GNOG and (possibly) Sportradar all elected to participate in reverse mergers as opposed to filing a traditional IPO. Van Egmond explained that “SPACs can shorten the timeline [of going public] by several months” (there are also some innate certainty benefits to the reverse merger process). With sports returning, the market on fire (at least for tech-related stocks) and a presidential election on the horizon, there’s motivation to get deals done sooner than later.
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