9 Aug: DraftKings digs deep for Golden Nugget
DraftKings GNOG acquisition + analyst reaction to Q2 results, Bally Corporation, Scientific Games Q2s +More
Hello and welcome to another packed newsletter. Adding to what has been termed the current “M&A frenzy”, DraftKings somewhat surprised the market this morning with the announcement of a $1.56bn all stock buyout of Golden Nugget Online Gaming. We have the commentary from that deal as well as some analyst reaction to last Friday's DraftKings results. Then there is the action and reaction to the Q2 statements from Bally Corporation and Scientific Games.
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DraftKings acquires Golden Nugget Online Gaming
A rich seam: DraftKings acquires Golden Nugget Online Gaming in an all-stock transaction valuing GNOG at approximately $1.56bn. The offer is at a 7.6x multiple on 2022E revenue and is a 51% premium on GNOG’s closing price on 6 August. GNOG will own 6.6% of DraftKings going forward. The transaction is due to close Q1 2022. In prepared remarks (no Q&A), DraftKings CEO Jason Robins was clear about the rationale for the acquisition of GNOG. “DraftKings has done a tremendous job to become an iconic sports betting brand and has been great at cross-selling into igaming, but it has not yet reached non-sports fans who are igaming customers.” He added that DraftKings has a “mainly male clientele” and the acquisition will diversify the user base and enable it to access GNOG’s 50% female customer base.
“We’ve achieved top three in states where we are active, but there is a substantial segment that is not into sports but highly active in igaming: it’s a tremendous opportunity to broaden demographics and deepen market share.”
Tied in: The agreement means GNOG is now one of the largest DraftKings shareholders. GNOG chairman and CEO Tilman Fertitta said the group “wanted only stock” when discussing the transaction, “to drive up the value, be part of a winner and something bigger.”
“We want to be market-leader, the brand in the industry and build the best platform in the space,” Fertitta added.
Robins added that the all-stock deal “preserves our very strong balance sheet, means no debt and shows the excitement GNOG and Tilman have for the combined company.”
Live and direct: Being able to incorporate and leverage GNOG’s live dealer/igaming offering was another key factor in driving the acquisition. GNOG has developed its live dealer studios since 2015 and its live offering has made it one of the leaders in icasino. Golden Nugget’s land-based casino estate was another. Robins said it had been “very difficult for DraftKings to break through without a brick-and-mortar presence” and coordinating GNOG’s 5m-strong database and rewards program with DraftKings’ own across GN casinos, Landry’s restaurant chain and as part of the Houston Rockets NBA franchise belonging to GNOG owner Tilman Fertitta will maximize marketing efficiencies and create synergies of $300m at maturity.
The big kick-off: Ahead of the news this morning, analysts were last week digesting the company’s Q2 results where beat and raise should be the mantra after the company once again came out with forecast-busting numbers with the guidance for 2021 now at between $1.21-1.25bn or 14% up at midpoint on the previous target. But losses for H2 are also scaling up; Deutsche Bank are forecasting yearly EBITDA losses of up to $590m. It’s indicative of how the market is set to heat in the coming weeks.
“We expect the 3Q21/4Q21 periods to be the most competitive the OSB arena has experienced to date, with two large scale casino operators poised to spend considerably, as they make their respective entrances, in a dedicated fashion, into the space.”
Stand and deliver: DB suggest the ability to grab or retain market share will be the key differentiator during the coming NFL season and that DraftKings’ relatively conservative forecasts are “perhaps allowing for the potential for share losses as new entrants roll out.” Macquarie noted that using a calculation of market share vs market cap, DraftKings’ current valuation implies market share of 30%. The challenge presented by Caesars, Penn National and MGM means DraftKings’ retention tools “will be put to the test”. Meanwhile, the marketing pressure is already telling; DB noted that DK will be “incorporating’ a small element of nationwide spend this NFL season. But at least it has the spare change; at quarter end it had $2.6bn of cash on the balance sheet.
Asia no more: Alongside the notification of a subpoena from the SEC to explain itself in light of the content of the attack from the short-seller Hindenburg, DraftKings also said in its 10-Q that the Asian reseller relationship at the centre of many of the allegations had come to an end. Recall, this Asian reseller - named as BTI/Coretech by Hindenburg - was accused of being a front entity for DraftKings’ “undisclosed illegal gaming division.” The question now is whether the severing of ties is enough for the SEC.
Scientific Games Q2
The top line
Revenues up 63% YoY to €880m, adjusted EBITDA up 217% YoY to $383m and best ever quarter in company history, AEBITDA margins up 19 bsp to 53%.
The company reduced leverage by paying down $500m since October 2020 to $8.2bn.
Product breakdown: gaming was up 303% YoY to $367m, lottery up 27% to $266m, SciPlay down 7% to $154m, digital was up 27% to $93m.
Peer pressure 1: SG said it had received strong interest in the sports-betting and lottery divisions after it announced in July it was hiving them off. It said there were “nice competitive tensions” among potential bidders, showing the value of the companies being sold. President and CEO Barry Cottle said the sale would enable SG to continue deleveraging and become a truly “cross-platform global gaming company” and his teams were running “a quality process at pace and continuing to deliver record results.”
Franchise deal: Newly-acquired slots developer Lightning Box’s content will be rolled out through “a franchise approach” that enables repeat business at scale, said Cottle.
“The vision is to be the leading global gaming company in the world and roll the content out through land-based, online and social media.”
The group will “lean in on digital content through the incredibly talented studio that builds authentic land based-like games in the digital space. They’ve had very good success in the US because of that.”
Coining it: In common with counterparts across the industry, CFO Mike Eklund said the strong margins experienced by SG were sustainable. “International markets are opening up again, people like to play our games and are coming back: coin in, active units, revenues per day are all continuing to improve.” Both Eklund and Cottle said they hadn’t experienced any supply chain issues so far and SG was “well positioned to meet demand” and hadn't missed any targets thanks to “strong productivity and operational excellence.”
Bally Corporation
The top line
As pre-announced, revenue came in at $267.7m and adjusted EBITDA of $83.8m, both comfortably ahead of consensus.
Debt resolution: The funding arrangements for the Gamesys acquisition were announced ahead of the results last Friday. The debt consists of a revolving credit facility of up to $620m and a term loan facility of $1.95bn. At the time of its Q2 pre-announcement, Bally said it had turned down a financing offer from Gaming & Leisure Partners. It recently earned a first-time issuer rating of B from ratings agency Fitch.
Waiting for my man: While BallyBet is now live in Colorado and Iowa, management was keen to suggest that once the company completed the Gamesys deal and installed incoming CEO Lee Fenton in place, the pace of online development at Bally would step up. Steve Capp, CFO, said adding Gamesys would be “transformational” for the online business while Adi Dhandhania, SVP Strategy and Interactive, suggested it was working behind the scenes on a newer version of the BallyBet app which will incorporate all the tech elements at valley’s disposal.
“A lot of what we are focused on right now is developing the 2.0 version which would involve the technology stacks of both Gamesys and Bet.works so we have shifted our engineering resources away from launching into additional states with the 1.0 version to focus on the 2.0 version,” Dhandhania added.
Peer pressure 2: Capp also noted the comments made by the competition in recent weeks with regard to spending on online marketing. “There is a lot of focus on this side of the business, of course, and some of our peers have said they will invest maybe $1bn in the next few years,” he noted. But while adding that Bally has some of the assets that others will be investing in - notably the back and front-end tech stacks - he suggested that the company would still be spending some cash later this year.
“We have a new CEO coming into the business in the coming months and so I don’t want to speak for him. But right now we expect to burn approximately $10m in the back half of this year and that may well increase to circa 10% of pre-tax cash flow into early 2022.”
Analyst one-liners
Keep on keeping on: While impressed by the Q2 earnings beat from Accel Entertainment, the Deutsche Bank team has suggested they will need to see “more evidence that recent revenue trends are sustainable, which could be curbed by current Covid concerns.”
Going for growth: Analysts at Truist are right behind VICI’s buyout of rival gaming REIT MGM Growth Properties. “We’re positive on the deal as it solves several MGP overhangs, including its single tenant exposure, corporate governance, higher cost of debt and limited index inclusion.”
Eastern shunt: Macquarie noted that Century Casinos is set to offload its low-margin Polish casinos and will likely use the proceeds for M&A opportunities in the US. “The company has been adamant around growing through M&A, even during the COVID pandemic,” they wrote in response to the company’s “impressive” 36% EBITDAR beat in Q2.
Newslines
Cardinal sin: BetMGM has announced an access deal for the upcoming sports-betting market in Arizona via partnerships with the Gila River Hotels & Casinos and the Arizona Cardinals. Alongside the online operations, BetMGM will also open retail sportsbooks at the three Arizona Gila River properties and at State Farm Stadium, home of the Cardinals.
Launching in three, two, one… Barstool Sportsbook will this week add two more states to its burgeoning list. First up today is Colorado followed on Tuesday by Virginia. In last week’s results, Penn National said these were two of five states that will launch by the start of the NFL season with New Jersey, Tennessee and Arizona making up the rest. By the end of the year the total will be at least 10 states.
Calendar
10 Aug: Flutter H1
11 Aug: Full House Resorts, Fubo TV
12 Aug: Entain H1, Leovegas Q2, Bragg Gaming Q2, Zeal Network Q2, Acroud Q2
13 Aug: NeoGames Q2 earnings call, Sector watch - payments
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