DraftKings’ Scrapped Entain Bid Raises Concerns and Questions, Says Analyst

Posted on: October 28, 2021, 10:39h. 

Last updated on: October 28, 2021, 02:18h.

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

In one of this week’s biggest gaming industry stories, DraftKings (NASDAQ:DKNG) said Tuesday it won’t move forward with an effort to acquire Entain Plc (OTC:GMVHY).

DraftKings Entain
DraftKings dropped its pursuit of Ladbrokes owner Entain earlier this week. An analyst says there are questions as to why there were talks in the first place. (Image: Bloomberg)

Investor reaction to the news was initially positive, owing to the fact that the Boston-based company floated a $22.4 billion cash and equity proposal for the Ladbrokes owner. That’s a massive sum for a company that’s not yet profitable, as is the case with DraftKings.

However, at least one analyst says that while DraftKings is walking away from Entain takeover talks, the fact that the discussions were held in the first place raises questions about the former suitor.

While the decision to back away Entain simplifies DraftKings investment thesis, we believe the initial bid highlighted several unaddressed overhangs,” said Roth Capital analyst Edward Engel in a note to clients.

Engel initiated coverage of the online sportsbook operator earlier this month with a “sell” rating and a $41 price target. He’s the only analyst with a bearish rating on the shares.

DraftKings Move on Entain: Questions Galore

When DraftKings approached Entain in September with a $20.5 billion takeover offer, which was ultimately rejected, speculation swirled regarding what the suitor’s intent was.

Analysts and market observers mulled a variety of theories, including DraftKings looking to gain full control of BetMGM (Entain owns 50 percent of that venture). They also considered that the would-be buyer was angling to get its hands on Entain’s robust technology stack, leveraging the purchase of the Coral owner to boost cash flow and become profitable, or making the deal to gain exposure to new markets. There was also a school of thought that the courtship would never make it to the altar, and that DraftKings was doing no more than running up the price of the target for another buyer.

Roth’s Engel mentions the tech issue, noting that while DraftKings owns SBTech, “Interest in Entain’s industry-leading tech stack sparks debate over whether DraftKings is unsatisfied with its current platform.”

As for the cash flow part of the equation, DraftKings has $2.6 billion in cash — enough to survive for several years at current burn rates. But Entain is profitable and cash-flow positive. DraftKings’ pursuit of the company could be a sign it’s worried about when it will cease losing money, which Engel forecasts won’t happen until 2025.

Domestic Concerns

There’s no denying the US is the world’s fastest-growing sports wagering market. But it is also intensely competitive. Operators such as DraftKings face significant capital expenditures to attract customers, many of whom are fickle and are merely shopping for the best sign-up bonuses.

Along those lines, gaining exposure to markets outside the US is an attractive proposition. DraftKings would have gotten that with the acquisition of Entain, as the UK-based company commands a strong market share in Australia, Europe, and Latin America. As Engel points out, some investors might be concerned about the message DraftKings’ bid for Entain sends regarding the former’s view of the US market.

“Some investors have questioned why DraftKings would shift focus abroad when the US remains the most attractive global growth opportunity. This sparked concerns whether DraftKings feels less enthusiastic about the US, causing it to pivot to other opportunities,” he said.