DraftKings Already Seen as Takeover Target Despite not Being Public nor Profitable

Posted on: January 26, 2020, 04:30h. 

Last updated on: January 26, 2020, 01:12h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings isn’t yet a public company, but its stature could make the company a compelling acquisition target for traditional gaming operators looking for entries into a fast-growing market.

Jason Robins’s DraftKings isn’t yet public, but it may already be a takeover target. (Image: Fortune)

For the first nine months of 2019, the period for which data are most readily available, Boston-based DraftKings’ turnover soared to almost $200 million from $133 million in the year earlier period.

Exponential revenue growth like that, coupled with the company’s largely online footprint, are potentially attractive traits for old guard operators that are searching for ways to better connect with millenials and Generation Z, technology-savvy demographics that aren’t embracing brick-and-mortar casinos on par with previous generations.

The currently unprofitable DraftKings will emerge as the only pure play in online US sports gambling and a potential takeover candidate for industry leaders like MGM Resorts International (NYSE:MGM), Eldorado Resorts (NASDAQ:ERI), Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS),” reports Barron’s.

Last month, DraftKings announced plans to go public this year via a transaction that will see the company combine with Diamond Eagle Acquisition Corp. (NASDAQ:DEACU) and SBTech, a provider of sports betting technology and services.

Digestable Price Tag

Assuming a suitor emerges for DraftKings from the aforementioned group of gaming companies, most should find the cost of digesting the daily fantasy sports (DFS) and sportsbook company palatable. The transaction with Diamond Eagle, a special purpose acquisition company (SPAC), values the DFS company at $3.3 billion.

However, the SPAC’s stock has jumped 34.22 percent since Dec. 23, the day the DraftKings transaction was announced, vaulting its market capitalization to $4.8 billion.

The issue for any operator mulling a purchase of DraftKings is how long it will take the company to become profitable. For the first nine months of 2019, the firm’s net loss swelled to $114 million, a 52 percent increase from its $75.14 loss in the first nine months of 2918.

A case can be made that a buyer would be willing to pay up for DraftKings based on growth projections for US sports betting. Last year, Morgan Stanley forecast the domestic sports wagering market could be worth $7 billion or more by 2025. That estimate is based on the assumption that by that year, 36 states will have approved sports wagering, up from 20 today.

Evaluating the Suitors

Of the group of Eldorado Resorts, Las Vegas Sands, MGM and Wynn, Eldorado makes the least sense as a potential buyer for DraftKings, at least over the near- to medium-term.

The company is in the process of finalizing a $17.3 billion takeover of Caesars Entertainment (NASDAQ:CZR), and while CEO Tom Reeg has publicly mentioned an appreciation for Caesars’s vast online casinos and sportsbook operations, he has also said those units could eventually be spun off to wring more value out of them for investors.

There would be synergies for MGM, a company that has been building its own sports betting empire via partnerships with leagues, restaurant chains, stadiums and teams, one that expands to sports beyond the usual fare.

As for LVS and Wynn, either company could afford to buy DraftKings. Sands had $3.83 billion in cash on hand at the end of the third quarter while Wynn had $1.67 billion.

Of the two, the Encore operator has been more active on the sports betting front in recent months, inking a partnership deal with Full House Resorts, Inc. (NASDAQ:FLL) for sports wagering in Colorado and Indiana while reaffirming its desire to see Massachusetts, home to Encore Boston Harbor, approve sports gambling.