What seemed like a price too good to be true for Fanatics to buy PointsBet‘s US operations could be out following an offer by DraftKings.
DraftKings announced a $195 million cash offer for those US assets from PointsBet on Friday morning, which is 30% higher than the $150 million Fanatics offered. Early market response from DKNG investors was positive, with the stock up in premarket to open about 0.7% higher than Thursday’s close.
The offer would not affect the company’s goal of being adjusted EBITDA-positive in 2024 and would be accretive to adjusted EBITDA in 2025. Still, the deal will likely be seen more as a move to block Fanatics from key market entry points instead of as a pure play for PointsBet assets.
The PointsBet board is reviewing the DraftKings proposal but remained in favor of the Fanatics bid until that review is complete. PointsBet has a shareholder meeting scheduled for June 30 to vote on the Fanatics offer.
No guaranteed deal from DraftKings
The PointsBet board pointed out the offer from DraftKings does not constitute a binding offer. That means there is no guarantee DraftKings will actually negotiate and carry out a purchase of PointsBet.
DraftKings, however, said it is “fully committed to pursuing” the deal despite no binding offer. The offer also has the “full support of the highest levels of our organization.”
The board will consider three primary factors amongst others:
- All things shareholder value, including the amount and timing of capital returned to shareholders.
- Whether the deal can be completed in a timely manner.
- Whether the terms are more favorable than the Fanatics transaction.
Definitive agreements could come in three weeks
DraftKings assured PointsBet it could act quickly, though not quickly enough for that June 30 shareholder meeting:
“Subject to prompt access to management and requested information, we are confident that due diligence could be completed and definitive agreements executed in approximately three weeks.”
DraftKings could also likely close on a PointsBet acquisition faster than Fanatics. Fanatics still has to get approval from gambling regulators in many states. DraftKings, on the other hand, is licensed in many US jurisdictions.
Not the first DraftKings disruption
This is not the first time DraftKings has offered a bid on a competitor’s potential target.
MGM Resorts maxed out at a bid of around $11 billion for its BetMGM partner, Entain, in January 2021. Entain felt it was undervalued and the two agreed to move on and continue working together on BetMGM, though MGM remained interested in Entain and was still open to a deal.
DraftKings then blew that offer out of the water in September 2021 with a $22 billion bid for Entain. That non-binding offer was pulled off the table just a month later.
This situation is also different, though, since PointsBet already accepted Fanatics’ offer. Eight of PointsBet’s 10 largest shareholders, which hold 44.58% of PBH’s issued shares, already flagged their approval of the Fanatics offer. Some of those approvals included a caveat about the absence of a “superior proposal.”
Fanatics CEO Rubin skeptical
The DraftKings bid is a desperation move to slow Fanatics’ transaction, CEO Michael Rubin said in a statement.
“We are skeptical of the DraftKings proposal which seems like a desperate move to slow down Fanatics and PointsBet from completing the deal as 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.”
Rubin saying the transaction would cost more than $500 million for DraftKings is not completely wrong, but it is not entirely right either.
Not a fair assessment of deal?
The price tag Rubin suggested includes the $245 million guaranteed marketing spend left with PointsBet’s deal with NBC Universal. That cash is spread over five years, though, so it would not impact DraftKings’ 2023 year-end cash.
PointsBet planned to shift its marketing to a more localized approach with NBC, but that does not have to be the route DraftKings takes with the committed spend. DraftKings could find synergies in its national marketing budget and that ~$49 million annual commitment to offset some of that cost.
Biggest plus for DraftKings could be blocking Fanatics
The biggest positive DraftKings would get from a PointsBet purchase would be stopping the advantage it gives to a new market entrant in Fanatics.
Fanatics right now has no access to New York, where the synergies with its fan gear business could make the company one of the only to turn NY sports betting into a profitable endeavor despite the 51% tax rate. Buying PointsBet gives Fanatics a New York license.
It also likely keeps Fanatics out of the Michigan and New Jersey iGaming markets. Michigan has no licenses available, while there are not many in New Jersey. Fanatics would also lose out on a Virginia sports betting license and would have to spend $20 million for a mobile-only sportsbook license in Illinois without the PointsBet acquisition.
DraftKings would also gain PointsBet’s average single-digit market share per state, which would help close the gap between DraftKings and FanDuel in the states where FanDuel leads.
Upside to operations, too
Of course, DraftKings also acquires the use of the technology PointsBet built or acquired in the past few years.
That includes Banach, which has helped improve PointsBet’s live betting product since its $43 million acquisition in March 2021. It also includes the Points Betting system, which is a differentiator that could be attractive to customers.
DraftKings also gets PointsBet’s database, of course, though there may be a high level of redundancies in the two lists given DraftKings’ promotional activity whenever it enters a new market.
Analyst says bid “unsurprising”
All things considered, it is not a surprise to see the bid from DraftKings, Lloyd Danzig, founder and managing partner of Sharp Alpha Advisors, told LSR:
“It’s unsurprising that DraftKings made a competing offer considering the price point of the previously-contemplated acquisition, the relative value of consolidating market share given DraftKings’ current market cap, and the prospect of blocking a competitor from expanding.”
LSR reporter Mike Mazzeo contributed to this story.
