DraftKings [DKNG] has muscled in on a deal for gambling company Entain [ENT] after MGM’s [MGM] effort to acquire the business fell flat. Unfortunately, DraftKings’ share price hasn’t responded well to the news, slipping more than 16% since 17 September.
The deal is notable in that Entain is a company that is less than a year old and is looking to be acquired by an established player that owns several major brands, including a couple of UK high street bookies. It also comes at a time of consolidation in the industry and growth in the US as more states legalise sports gambling.
What’s happening with DraftKings’ share price?
DraftKings’ share price woes started a few weeks before the recent plummet. On 9 September – the day it launched online sports betting in Arizona – the stock closed at $63.67, a level not seen since the beginning of April.
Less than a week later, on 14 September, DraftKings’ share price closed at just over $59. Year to date, DraftKings’ share price is up by more than 7% and has seen plenty of volatility in that time.
DraftKings audacious bid for Entain
DraftKings’ bid for Entain is nothing short of audacious. First, at £18.4bn, DraftKings’ bid is higher than its own market capitalisation and comes at a time when its net losses are growing. Second, DraftKings is a company formed in 2012 that is looking to buy another company that owns some of the most iconic brands in the gaming world. Should DraftKings pull off the deal, it would eclipse Flutter as the largest gambling outfit in the world.
One prize is the US sports betting market which has seen explosive growth as more states legalise sports gambling. Last year, sports betting revenue came in at $237.5m, a 53.5% jump year-on-year. So far, the number of states that have legalised sports gambling stands at 32 states, with big markets like Florida and California still to re-open.
Valuation of sports betting revenue in 2020 - a 53.5% YoY rise
Complications include Entain being a partner of MGM Resorts – a competitor to DraftKings. Entain had declined an £8.09bn takeover bid from MGM, saying the offer was too low. The two are partners in BetMGM, one of the biggest operators in the US gaming industry. As MGM is an exclusive partner with Entain in the US, any deal would need a nod of approval.
Consolidation continues in the sports gaming sector
The background to this is increasing consolidation in the global sports betting industry. Aaron Brown, the author of The Poker Face of Wall Street, pointed out in a Bloomberg column that the “revenue of the top five companies has tripled, driven by 70% growth in industry revenue and an 80% increase in concentration, or those five firms buying smaller rivals.”
According to Brown, bigger operations allow companies to diversify risks. It also allows companies ‘to focus on the “lifetime value” of a customer rather than competing in a commoditized market for soliciting bets.
Scratch beneath the surface, and the major gaming operators are a combination of traditional bookmakers and online innovators. For example, Flutter owns both Paddy Power and Betfair, while DraftKings owns Golden Nugget.
Taking over Entain allows DraftKings to cement its position in the global market by acquiring some of the best-known brands in gambling and reducing the competition. DraftKings – a digital brand – would also have a real-world presence through Entain’s UK network of bookies Ladbrokes and Coral.
Among the analysts tracking the stock on Yahoo Finance, DraftKings has an average $71.52 price target, representing a 42% upside on 28 September close. Wells Fargo initiated coverage on the stock with an overweight rating to go with its $73 price target. The brokerage cited DraftKings’ position at the top of the US sports betting and iGaming market. Wells Fargo sees a potential 17% upside to its iGaming market share as it integrates Golden Nugget Online and targets casino players.