DraftKings Makes 11th-Hour, $195M Bid to Undercut Fanatics, Acquire PointsBet
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DraftKings submitted a $195 million unsolicited bid for PointsBet’s U.S. business on Friday morning in what amounts to a massive gamble by one of the country’s biggest gambling outfits.
The proposal, announced by PointsBet, is about $45 million more than the one offered by Fanatics last month.
While PointsBet’s board had agreed to the Fanatics deal, shareholders have yet to officially accept Fanatics’ proposition and were scheduled to vote on the prospective acquisition on June 30. Despite the DraftKings salvo, PointsBet's board still recommends taking Fanatics' initial offer — until a thorough review of DraftKings' newest proposal is conducted.
"The directors of PointsBet are committed to acting in the best interest of all shareholders and are considering the DraftKings proposal alongside its advisers," the company said in a statement. "Subject to the outcome of the review being undertaken of the DraftKings proposal, the Board continues to recommend that shareholders vote in favour of the (Fanatics) transaction."
DraftKings’ newest offer doesn’t do much to generate profits in the short-run. Nearly every state that PointsBet operates in, DraftKings does as well — so this isn’t a play for market share. And DraftKings already has robust departments in risk management, trading and otherwise — so this isn’t about poaching talent.
So why the 11th-hour bid? It could simply be a ploy to slow Fanatics’ foray into the sports gambling space by denying the company access to three key markets — New York, New Jersey and Michigan.
"We are skeptical of the DraftKings proposal which seems like a desperate move to slow down Fanatics and PointsBet from completing a deal," said Fanatics CEO Michael Rubin in a statement. "The purchase price and other financial commitments will total more than $500 million — so they are using the majority of their projected year-end cash just to try to block us."
DraftKings currently projects roughly $900 million in free cashflow. Couple that with the required $250 million in advertising spend over four years with NBC — a mandated caveat in acquiring PointsBet — and one can see how financially precarious this deal may be in the long run. If accepted, this acquisition would tie down roughly 50% of DraftKings’ existing reserves.
On the flip side, a re-negotiation of the NBC deal is possible and would still result in revenue, especially given the grand stage of the NFL. Even if nothing is cut, $62.5 million per year pales in comparison to the company's more than $1 billion in annual sales and marketing budget.
"It appears to us that DraftKings is making a proposal to impede Fanatics, a well-capitalized competitor with a large database … from accelerating its U.S. gaming launch by acquiring PointsBet itself," said the research firm Oppenheimer in a research note on Friday morning.
In New York and Michigan, no licenses would be available for Fanatics without an acquisition. Fanatics may have trouble attaining the New Jersey market, too, without purchasing an existing licensee.
New York and New Jersey are the country’s two biggest markets — ahead of Vegas and Nevada.
And crucially, Michigan and New Jersey are two of only four states that permit iGaming — such as blackjack, poker, baccarat and craps — which have much, much higher profit margins than sports betting does.
“While we continue to focus on operating more efficiently and driving substantial organic revenue growth in the United States, we will also look to prudently capitalize on compelling opportunities at attractive valuations, as is the case with PointsBet’s U.S. business,” said DraftKings CEO Jason Robins in a statement. “We believe DraftKings is uniquely positioned to submit this superior proposal due to our scale and corresponding ability to generate meaningful synergies from the acquisition."
DraftKings CFO Jason Park added that the deal would allow DraftKings to offer “interesting new bet types and accelerating our roadmap of bringing in-house more of our mobile sports betting technology,” but this all would come at significant cost.
"This seems like a lot of money to spend for this," one analyst who covers gaming told the Action Network. "This looks like a sign of fear to me. It doesn't make a lot of sense."
Research analysts across gaming expect Fanatics to compete with behemoths DraftKings and FanDuel once the company’s sportsbook is expected to launch this fall, ahead of the NFL season. That’s on account of being able to market directly to its millions of customers in the merchandising space — to go along with a high Q-Rating among general sports fans.
"Backed by Fanatics’ resources for product development and marketing — and a massive database to market to — the operator could take significant share in our view,” Eilers and Krejcik wrote in a recent report.
After a rough 2022 that saw DraftKings’ stock drop about 59%, the company has rebounded heavily. The company’s stock is up 125% year-to-date, far ahead of its competitors Penn (-12%), Caesars (+19%), MGM (+31%) and Flutter (45%) over the same timeframe.
And initially, the markets were bullish about DraftKings' Friday morning move. DKNG was up 1.5% at open. Since that point, the stock has about evened out from yesterday's closing price.
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