DraftKings (NASDAQ: DKNG) ended its pursuit of Entain (LSE: ENT) last week. The American online sports betting operator previously bid more than $22 billion for the British gaming group, a 46% premium to the ENT stock price at prior day close. While the prospective deal is now dead—we heard it was never particularly far along to begin with—it is reasonable to believe DKNG still covets the global scale and positive cash flow Entain would have provided. We sought to identify the most likely targets, should DraftKings opt to make a play for another European operator. DraftKings, in a quiet period ahead of Friday’s Q3 earnings call, declined to comment for our story.
JWS’ Take: DraftKings’ offer for Entain, whose brands include bwin, Coral and Ladbrokes, was worth more than twice as much as MGM Resorts’ (NYSE: MGM) play for the company late last year. While some view the rich bid as indicative of DKNG’s ambition to be more than a U.S. growth story, others see it simply as a byproduct of current market dynamics. To take down a publicly traded company, a premium to the share price must be paid. Otherwise, shareholders will not accept the deal (see: MGM’s rejected offer). ENT’s market cap was around $15 billion at the time of the offer.
In addition to said premium, DraftKings was going to need to compensate MGM. That is because the British holding company is a 50-50 partner in BetMGM, a joint venture structured to ensure neither company could be acquired by a competing U.S. business without the other’s approval. Naturally, MGM wasn’t going to provide consent without compensation.
The public does not know the nature of any discussions that may have taken place between DraftKings and MGM. So it is hard to get a true sense for how investors viewed the proposed deal by looking at the companies’ respective stock movements (DKNG -.5%, MGM -2%, ENT -4%) since the collapse. Retail investors were looking at an incomplete picture.
If DraftKings does feel a sense of urgency, it is likely the result of both its standing as a highly valued public company and the economic reality of the U.S. sports betting market. Publicly traded American online sports betting operators, particularly ones with a sizable market cap, need to continually show investors they are growing (if not in profits, then in gross revenues, users or market share).
They also face the economic reality of sports betting in America—it takes a ton of money to compete. While the domestic stock market currently rewards growth at any cost, it is not realistic to believe investors will allow companies to be unprofitable forever. Very rarely does the market accept a public company to lose money for an extended period of time. And when the leeway runs out (perhaps as soon as year end ’22), upstart online sports betting operators are going to need a way to support and grow their businesses. So going out now, at a time when the company’s share price is high, in pursuit of scale and profitability (see: European companies) is a savvy move. Companies with high multiples should be trying to take advantage of that currency.
DraftKings’ rival FanDuel holds a meaningful market-share advantage in the U.S. (Eilers & Krejcik Gaming estimates FanDuel captured 38.66% to DraftKings’ 24.26% and BetMGM/Borgata’s 13.83% over the three-month period ending in August), in part because it took on a large investment from a powerful European operator. Flutter is a profitable, global business, and the cash flow it generates enables FanDuel to invest at a level that is hard for others to maintain. Synergies between the two companies have also given FanDuel the ability to provide a differentiated product (think: more opportunities to bet). The setup is one competitors envy.
The cash flow Flutter generates should continue to pay dividends for FanDuel as the U.S. market matures. Gambling is a grind-it-out, long-term business—with growth. Companies cannot quickly spend their way to permanent market shifts. That makes it tough for a company consistently operating in the red to succeed long-term. For reference, DraftKings reported a net loss of $347.7 million in Q3 2021.
If DraftKings is still in the M&A market and Entain is no longer under consideration, it is logical to wonder which other companies could fit its needs. Super Group (which owns BetWay), 888 Holdings and Kindred Group (which owns Unibet) are among the few big, profitable global companies online. But that group is a pretty far fall from Entain in terms of both global reach and relevance. DKNG is not going to be able to buy Flutter, and privately held Bet365 is likely also too large for a takeover.
Of course, it is not evident how those companies might feel about DraftKings’ current valuation (assuming it were a stock-laden deal, as the Entain offer was). There could be concerns about multiple compression.
It’s also not clear if DraftKings has a technology need (Entain has its own tech stack) and how that might play into the process. If it does, it would lend credence to the theory that the company is not done looking around. But the fact DKNG put pencils down on Entain leads at least some industry insiders to believe CEO Jason Robins is confident enough in SBTech.
Entain shouldn’t miss a beat, even after the failed DraftKings talks. The company has exposure to the U.S. market via BetMGM, and it generates plenty of cash flow from other markets around the world. In other words, Entain simply didn’t need the deal.