Those waiting on Fanatics’ long-anticipated first move into sports betting will need to wait a little longer. The company disputes recent reports suggesting it has agreed to a deal with Amelco. While it remains to be seen if Fanatics and Amelco are ultimately able to strike a partnership, Chris Grove (CEO, American Affiliate) says Fanatics would be wise to acquire a proven tech stack “on which it can build the unique Fanatics sports betting experience.” By doing so, the company could cut down on the time it needs to launch a product—a competitive advantage in the fast growing U.S. market.
JWS’ Take: The status of a possible Fanatics-Amelco deal is unclear. Fanatics was adamant in saying nothing has been finalized regarding Amelco when reached for comment, and Amelco did not respond to our inquiry.
But there are reasons the reports of a deal generated so much industry interest. Constructing an online sportsbook from the ground up is a challenging and time-consuming endeavor. These are complex software platforms with a multitude of moving parts. Grove likes the idea of Fanatics buying and building on a platform that has already been GLI certified and tested in most if not all states. Having an existing source code as a jumping-off point would allow Fanatics to “skip a few development cycles” and as he noted, “speed to market is a competitive advantage in a market growing as fast as the U.S. [in terms of both money wagered and new states opening up].”
The reason skeptics viewed the rumored software acquisition as a mistake is that the operators on the Amelco platform are not among the U.S. market leaders (think: Fox Bet and PlayUp). But Grove said that point is irrelevant. “None of those companies are relevant comps, at all, full stop. None of those companies took the Amelco code base and built a new product on top of it, which is what Fanatics would be doing. Fanatics would not be taking the Amelco product [to market like those other companies did].”
Fanatics could in theory still opt to strike a more traditional B2B licensing deal with IGT, Kambi or Openbet if it wants to go down the plug-and-play route. But Grove said the consensus belief within the industry is “the ability to customize or differentiate [one’s product] will ultimately be important [for operators] in the U.S. market.” That will not be possible if the company licenses its technology.
The question is to what degree. Brand, marketing assets, database assets and existing customer relationships are also expected to figure into the customer acquisition and customer loyalty equation.
Reports on the rumored Fanatics-Amelco tie-up said Fanatics could end up paying more than $100 million over the life of the deal. While nine figures may sound costly, Grove reminds “Bally’s paid $125 million for BetWorks. Boyd [Gaming] just paid $170 million for Pala [Interactive]. PointsBet paid $43 million for [Banach Technology]. So it’s definitely not a number that would have been an outlier when we’re talking about a comp set for online gambling technology that has a chance to be a differentiator in this market.”
Fanatics has long been expected to make a sports betting splash, and the company is believed to be targeting a launch before the end of the ’22 NFL season. It remains unclear if that time frame remains realistic considering the tech development that would still need to be done once any deal is consummated and the fact that the company presumably still needs to find market access. While Grove could not speak to the company’s plans, he guaranteed that market access would not be the holdup. “They may not have announced it yet, but Fanatics has almost certainly secured market access [via commercial arrangements] in multiple states,” he said. Fanatics did not respond to multiple attempts to confirm the company has market access lined up.
Grove sees an eventual deal for a fully baked tech stack as likely to be the first in a series of sports-betting-related M&A for Fanatics. “It’s something the company is clearly comfortable with. They have the valuation and equity base to work with if they want to utilize that as an instrument. And they have an intriguing brand that will be attractive to potential targets.”
While the American Affiliate executive anticipates the bulk of those deals will be of the additive variety (think: online casino or bonusing technology), he would not rule out a “transformative” acquisition (think: DraftKings) at some point. “They have the firepower and the ambition,” he said. Remember, Fanatics recently raised $1.5 billion at a $27 billion valuation. DraftKings’ market cap is less than $7 billion.
Fanatics could eventually become a sports betting leader. “They certainly have the resources and team to play for a podium spot,” Grove said. But he cautions that it is “a competitive environment and their ability to leverage other assets is what will ultimately be the difference maker. Right now, it is not clear how valuable that database [of 80 million e-commerce customers] and those integrations really are. At some point, a database becomes so large that it’s just a phone book.”
Failing to obtain a podium spot does not necessarily mean that Fanatics’ current valuation is too high. Grove argues that if Fanatics’ valuation was contingent upon becoming an online sports betting market leader, DraftKings’ current valuation would be higher than it is (DKNG is one of the clear market leaders). “Public markets have set a clear price for a tier-one U.S. online betting company via DraftKings’ valuation,” he said. “Given the gap between that price and Fanatics’ valuation, it seems clear that investors expect Fanatics to be competing for a larger opportunity than betting alone.”