DraftKings recently agreed to buy Golden Nugget Online Gaming in an all-stock transaction valued at $1.56 billion dollars (pending GNOG shareholder approval). Considering GNOG controls less than 1% of the U.S. online sports betting market, Chris Grove and Chris Krafcik (partner, Eilers & Krejcik Gaming) wrote in a note to clients, “It’s clear that this transaction was first and foremost about improving DraftKings’ positioning in the increasingly competitive U.S. online casino market.”
But while the tie-up is expected to serve as a defensive hedge in the iGaming gold rush, Hedgeye Risk Management gaming, lodging and leisure sector head Todd Jordan insists there are too many other positives in the deal to consider the acquisition solely an attempt to protect market share. There are “a lot of synergies and cost cuts beyond that,” he said (think: platform savings, marketing efficiencies, market access cost savings). DraftKings CEO Jason Robbins seemed to confirm that was the case, stating the two companies would enjoy $300 million in synergies at maturity.
Our Take: GNOG shares are up 55% since the news broke, “so maybe [$1.65 billion] is a big valuation,” Jordan observed. But DraftKings is buying the iGaming operator with stock, and “they have a big valuation [in their own right]. It makes sense to use their stock as currency at this stage of the game,” he said. Of course, preserving the balance sheet also allows for more M&A.
Fertitta’s decision to take a large equity position in DraftKings would seem to indicate he believes “the overall valuation is reasonable or attractive given where the company is headed long-term,” Jordan said.
The acquisition should be accretive to DraftKings from both a valuation and cash-flow standpoint. But Jordan says with investors “looking out five, six, seven years, and trying to calculate where the company will be, and then discounting that back,” the deal wasn’t made with a focus on the company’s current financials.
Most people think of DraftKings as a sports betting and/or daily fantasy sports operator. And an overwhelming amount of their top-line revenues do originate from those two streams. But iGaming is increasingly being viewed as an important segment of the business, in large part because we are “starting to see more openness to it [at the state level],” Jordan said. “The markets have been bigger and better than people thought they would be.”
IGaming has outperformed expectations because operators have found customer acquisition costs to be significantly lower than they are on the sports betting side of the business. Jordan explained: “Hard casinos have databases full of players and the overlap between online [iGaming] players and players in the casino is pretty direct. So, [operators] haven’t had to offer a ton of incentives. But for sports betting, there are usually millions of dollars in free play or other costs needed to get people to sign up.”
IGaming operators also have the luxury of taking a more targeted approach when they look beyond affiliated brick-and-mortar clientele. “Databases exist of people we know to be really good [casino] gamblers, that we know a lot about,” Jordan said. That is not the case with a nascent industry like sports betting.
The value in gaining access to 5 million-plus “high-value casino-first players” (the size of the Landry’s customer database) cannot be understated, Grove and Krafcik wrote, particularly for a company that recently acknowledged its struggles penetrating the segment. DraftKings has estimated every incremental 5% gain in iGaming market share is worth $675 million in gross revenue at maturity. But it is important to put the size of the GNOG database into perspective. Caesars has 60 million entries in their database. MGM, the U.S. online casino market leader, has 36 million.
If the size of those databases alone did not make DraftKings feel as if its iGaming market share (which will climb to 24% in New Jersey post-merger) was under pressure, anticipation of the market getting tougher likely did. “Caesars is preparing to spend $1 billion hammering its land-based database over the next two years, and the FanDuel-Boyd Stardust venture is likely plotting ways it can extract more from the Boyd database,” the Grove and Krafcik note said. For reference purposes, BetMGM is believed to have 26% of NJ market share.
DraftKings has struggled to penetrate the iGaming segment, because they have had trouble driving the “casino-first customer cohort,” Grove explained in a recent conversation. But Robbins said in a statement that the company has been “very good at cross-selling sports customers into iGaming.”
Expect them to get even better with “a bigger presence and a brand that is probably more effective for iGaming,” Jordan said. DraftKings plans to retain the Golden Nugget online casino brand and take a multi-brand approach to marketing their products.
Despite initial doubts, the gaming industry has learned over the last three years that there is overlap between sports bettors and iGaming players. So, “it makes sense [for DraftKings] to try and cross market them,” Jordan said. But the Hedgeye analyst expects the company to have more success turning sports betting and DFS users into iGamers than the other way around—particularly with the added iGaming expertise, multi-brand and omni-channel marketing options they will have post-merger. “They are also adding some interesting [proprietary technology], a live dealer product that nobody else has,” he noted.
DraftKings does not own any brick-and-mortar casino properties, so the company currently maintains revenue-share agreements with physical casino operators (i.e. those that control the online sports betting skins) to gain market access. But with Golden Nugget having a presence in Louisiana, New Jersey, Nevada, Illinois and Mississippi—and Fertitta now heavily invested in DraftKings (he’ll become a board member and one of the company’s largest shareholders)—”over time the company will be able to migrate to Golden Nugget’s assets and recapture the whole 5-7% [they are paying out in rev-share],” Jordan said.
DraftKings’ deal with Golden Nugget Online Gaming includes a commercial agreement with Fertitta Entertainment, which in addition to reducing market access costs, will give the company an exclusive online gambling partnership with the Houston Rockets. While Jordan considers the affiliation “additive,” he notes that team deals are relatively commonplace for the company, and the franchise is “not the Yankees, Lakers or Cowboys” in terms of its ability to move the needle.