While the proliferation of special purpose acquisition companies fills traditional market watchers with nerves about a bubble, the swift expansion of sports betting across the U.S. may be able to sustain the wave of sports-centric blank checks for years to come, according to investors and participants.
“In terms of business formation and new strategies, we’re still in the early stages of this,” said Robert Heller, president and CEO of Spectrum Gaming Capital, an investment bank specializing in gaming, casinos and sports betting. “This is an immature business, and immature businesses are times of great opportunity for people to come into the space with disruptive technologies.” Heller is perhaps the longest-tenured gaming and casino analyst on Wall Street, having followed the segment since 1984.
That said, the sheer number of blank check businesses coming to market—more than 460 in 2021 alone—seem to support an emerging consensus that there are just too many SPACs, at least in the conventional wisdom of Bloomberg, the Harvard Business Review and the Wall Street Journal. “The SPAC market, like with all markets after they’ve had a significant run, will likely see a correction soon,” Wharton senior fellow in finance David Erickson wrote in December. His reasoning: There are just too many.
Yet there is evidence that as sports betting expands, many new businesses are being formed, too. The creation of companies recorded by the Census Bureau in the (admittedly broad) arts and entertainment sector, where companies like DraftKings and Flutter Entertainment sit, is 32% higher so far in 2021 than the same period in 2018—a couple of months before the Supreme Court struck down restrictions on sports betting. Today, there are more than 3,100 businesses in gambling alone, according to data from the NAICS Association. That excludes businesses lumped in with sports teams, like DraftKings, and businesses that provide data to bookmakers and others in the betting ecosystem, which are often classified as technology companies.
“Gaming, gambling, sports are massively underrepresented in the public market,” said Paul Martino, co-founder and general partner at Bullpen Capital, a venture capital firm that backed FanDuel and has other sports-betting-related businesses in its stable today. “It seems like SPACs are going to be here to stay, because so many assets in this category aren’t public.”
Martino and others say there are signs the SPAC boom isn’t a bubble but rather the reversal of market distortions brought about by private equity holding businesses too long to boost their paper returns, as well as regulatory steps in the 2000s that discouraged smaller companies from listing. For instance, at Amazon.com’s IPO in 1997, the business went public at a market cap of $438 million. Fifteen years later, Facebook didn’t go public until its valuation was $100 billion. More significantly, in 1998 there were 7,500 stocks in the U.S.—today, there are fewer than half that amount.
Starting with the 2012 JOBS Act, the SEC began clearing space again for smaller IPOs, including SPACs, by allowing businesses to be defined as emerging growth businesses, meaning they could go public with fewer regulatory burdens. “If there’s an enduring thing from this, it’s that maybe we finally have a way to get smaller companies to go public again. That’s probably a good thing for everybody,” added Martino.
In the past two years, three sports-betting businesses have used SPACs to go public: DraftKings; Rush Street Interactive, which has sports books in multiple states; and Golden Nugget Online Gaming, which has sportsbooks in two states. The two largest game data providers to sportsbooks, Sportradar and Genius Sports, are both closing deals to go public by SPAC. The expectation is that list will grow much larger. Right now, there are about two dozen sports-related SPACs formed that specify gaming or sports betting in their business plans, according to data compiled in the Sportico Sports SPAC Tracker. If all of them successfully IPO (almost half are still pending) the SPACs have $8.3 billion in IPO capital to deploy.
“At the moment you probably have five pure-play sports betting and igaming businesses that you can invest in, in the public market. This for a market that is $20 to $40 billion,” said Matt Davey, the CEO of Tekkorp Digital Acquisition, a gaming-focused SPAC that raised $250 million in an October IPO. “I think the ability of the public market to look for other ways to invest is strong, and I think the demand will be there. You could have 2,000, 3,000, 4,000 different companies throughout the sector. The sector is very young, and… I think you’ll be impressed with the quality of businesses that will go public, either by IPO or SPAC.”
Even while the deal flow should be there to provide targets for SPACs, sports betting is highly competitive and won’t make every deal coming to market a guaranteed winner, cautioned Spectrum’s Heller. For one, sports betting, unlike traditional casino games, doesn’t come with a built-in house edge—sports bring unpredictable outcomes that can generate large, unexpected losses for the house. Unlike existing casino mainstays like a slot machine, sports betting is more complex to operate because every match is different, and sports come with costlier data sources and other technologies that have to be paid for. Yet in the end sports betting provides just the same margin (called the hold), as the one-armed bandits—about 7%, according to Heller. Plus, in the rush to sign up customers in new states, outfits like DraftKings spend massive amounts of money to acquire new customers. “Sports betting is not making money for anybody,” explained Heller. “The key point is: Sports betting is an on-ramp for Internet-based gaming or gambling. If I can get the people on my app, for sports betting, or in my retail sports book, I can then get them to play other games that I’ll make more money on.”
There’s no doubt there’s a lot of money opening up in the quick expansion of sports betting in the U.S.—more than two dozen states have some form of legal sports betting, compared to just one before the Supreme Court struck down federal restrictions on sports gaming, in 2018. Illegal sports bets total $150 billion a year in the U.S., according to data compiled by Morningstar. By 2024, more than half of that amount should move to legal outlets, generating more than $6 billion in net revenue for the industry—and it’s quite possible that estimate is low. “The states in their quest for tax revenue are accelerating the timeline of all of this,” said venture capitalist Martino.
“The stock market loves this stuff; the investment community loves this stuff,” added CEO Heller. That means businesses will continue to be bankrolled by Wall Street for years, even if companies lose money all that time; after all, Amazon didn’t turn a yearly profit for its first nine years. “It pays to spend to build the business, build the technologies, capture the customers so that when it all gets sorted out you’ll be in control, and then you’ll make money. That’s the thesis,” Heller added. “There is going to be tremendous amounts of business formation and then business consolidation.”