The New York Post recently reported that Wynn Resorts is “quietly shopping” its online sports betting (OSB) business. According to the Post’s source, the company, is willing to unload Wynn Interactive (which operates WynnBet) for $500 million, a fraction of the $3.2 billion enterprise valuation floated back in May when the company announced a since scrapped merger between WynnBet and Austerlitz Acquisition Corp. How did the value of Wynn’s sports betting operation depreciate 84% in eight months? Soo Kim (managing partner and chief investment officer, Standard General and Bally’s Corporation chairman) said discounted transactions on growth companies are typical during an extended bear market. “When the equity markets go away, and all of a sudden cash is king, you see this kind of activity where different operators have to make decisions that they never would have considered before.” The Bally’s Corporation chair said the longer the downslope continues, the more consolidation—and steeper discounts—we will see. It should be noted two days after the Wynn report surfaced, Standard General made an offer to buy all of the Bally’s shares it does not own at a 30% premium (at a $2.07 billion valuation).
JWS’ Take: Wynn told the Post it had “no comment on any specific market rumors or speculation regarding Wynn Interactive.” But the company wanting out of the sports betting business is certainly a believable narrative. As CEO Matt Maddox stated during a November 2021 earnings call: “The market is not really sustainable right now. Competitors are spending too much to get customers. The economics are just not something that we’re going to participate in in the short term.” The Post story said Wynn was on track to burn through $100 million in Q3 and Q4 ’21 trying to compete.
Caesars, DraftKings, FanDuel and BetRivers’ approach out of the gate in New York only serves to support Maddox’s point. Despite the state’s 51% tax rate on gaming revenue, “The operators have [been unable] to help themselves,” Kim said. “They are bashing each other’s brains out for gross market share.” It is worth noting Bally’s has not yet launched its app in the Empire State.
The failed SPAC merger (announced days after the November earnings call) appears to have taken any wind that may have remained out of Wynn’s sails. The deal would have given WynnBet a $640 million marketing war chest. But Chris Grove (partner emeritus, Eilers & Krejcik Gaming) says the market rotation from growth-at-all-costs to EBITDA-producing equities really shattered the company’s “very specific vision of how to create value from a spun-out digital arm.”
Grove said Wynn’s plan was to lean on the public markets and capture “the same sort of forward multiples that DraftKings was getting”—capital that would be used to fund future growth. But with pure-play OSB operators experiencing downward price action month after month, it became evident that such growth wasn’t in the cards anytime soon (see: DKNG 69% off its ATH, RSI 58% off its ATH).
Downward price action tends to beget a different type of action—which is why Kim foresees consolidation on the horizon. “If you have growth [companies] funded by high growth valuations, and the high growth valuations disappear, then [those companies] better think about a different way to fund growth or get out,” he said.
Wynn may end up choosing the latter. Regardless of what Wynn does, Kim says at least some operators are likely to bail out if the market slide continues. “If [a company] last did rounds at much higher valuations, it is a tough decision. [It] either [has] to burn less money and make the money that [it has] last longer or [it has] to do a down round. If [it doesn’t] want to do that, [it needs to] sell the company…. The longer this bear market in sports betting lasts, the more you’ll see [operators] drop out,” and the steeper the discounts will become. Remember, growth companies are likely only carrying one to two years’ worth of cash on their balance sheets.
For the record, Kim believes the consolidation will be net positive and that the long-term prospects for the nascent industry remain strong.
If Wynn Interactive is sold, it would not be the first U.S. sports betting operator to trade hands in the last six months. Golden Nugget Online Gaming and theScore both got taken out H2 ‘21. Of course, those deals occurred at higher valuations ($2 billion and $1.56 billion, respectively).
The market has less exuberance for pure-play online sportsbooks today than it did when those deals were struck, Kim said, because while “revenues [continue to] grow, [they are not growing] as fast as they did in 2020 and [early] 2021. And you’ve seen companies not scaling to profitability, but actually losing more money as there are more competitors [see: MGM, Caesars] and bigger launches [see: New York].” The prospects of slowing growth and less profitability have weighed on current market sentiment.
MGM and Caesars have a distinct advantage over their pure play OSB counterparts. “They make money somewhere else. So they can fund losses in interactive without totally blowing up their models,” Kim explained. Their ability to exert pain (see: Caesars committing to invest $1 billion in its digital business over the next 2.5 years) is likely frightening to the growth companies and could lead to some exits down the line.
There are a number of European operators capable of exacting similar pain. And by and large, “They’re not here yet,” Kim noted. It’s another reason why he believes “this is [likely] the beginning of the consolidation wave.”
Standard General’s Bally’s takeover attempt is a variation of the consolidation Kim expects to see a lot more of. It remains to be seen if shareholders will accept Kim’s offer. BALY shares are up ~24% since the offer was made.
Like Caesars and MGM, Bally’s has a cash-flow positive brick and mortar casino business. So, the company is not reliant on the public markets to grow.
Being a private could be advantageous for Bally’s because it will enable the company to focus on building a profitable, sustainable business–as opposed to strategizing around the next earnings call. It should also allow the company to release its next gen product when it’s ready rather than rushing it out to meet expectations.
Standard General remains bullish on Bally’s in part because of Bally Sports’ tie-up with Sinclair/Diamond Sports. “We think there is a really interesting way to tie media with sports betting and casinos,” Kim said. But the recent news Sinclair will be moving forward with a DTC sports streaming service was not a factor in the decision. Kim said his hedge fund was long familiar with Diamond Sports’ plans and expected that the company would be able to execute on them.