Analysis: Does DraftKings Offer For PointsBet Make Business Sense?

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Days after the conclusion of the 2023 NBA Draft, PointsBet is on the clock with DraftKings and Fanatics.

Shareholders of the Australian gaming company are set to decide on the path forward for the US-facing segment during their upcoming June 30 meeting. The proposed $150 million deal with Fanatics Betting & Gaming announced last month is suddenly mired in some uncertainty.

DraftKings entered the conversation with a competing offer of $195 million, looking to steal the acquisition away from Fanatics at the buzzer. With the shareholder vote imminent, DraftKings is scrambling to finalize its proposal sheet before Tuesday.

The PointsBet acquisition would make obvious sense for Fanatics as it works to build out a brand-new product from the ground up. It needs more tech and more market access, and PointsBet has both of those in spades.

For DraftKings, however, the motivations for another transaction of this magnitude are less clear.

PointsBet rich with sports betting assets

PointsBet is active in 14 states, making it one of the 10 most-prolific online sports betting brands in the US. It also operates retail sportsbooks in four of those states, including its newest location aboard the Riverboat on the Potomac in Maryland.

It has tech too, which is no small matter in an industry that is still heavily reliant on third-party solutions. PointsBet requires little outside assistance to power its sports betting product, including a proprietary format called Points Betting and an elite in-play betting menu powered by their recently acquired Banach division.

Sometimes overlooked is the juicy deal with NBC Sports that PointsBet shoehorned its way into in 2020 and recently scaled back to remove Sunday Night Football. Although it has not parlayed the partnership into meaningful market share, that digital real estate is some of the most valuable in the industry.

This portfolio of assets has long positioned PointsBet as a possible target for acquisition, and that day has seemingly arrived. The Board of Directors unanimously recommended that shareholders approve Fanatics’ acquisition in the absence of a superior proposal.

DraftKings motives unclear

For DraftKings, the benefits of the proposed PointsBet acquisition are not so obvious.

It is currently the clear number two operator behind FanDuel, accounting for around a third of all US sports betting handle and revenue.  Although it is not yet profitable on the bottom line, DraftKings is trending toward break-even for the current calendar year.

It does not need market access, at least not the kind PointsBet can provide. DraftKings is already active in every PointsBet market and then some, 21 in total to lead all US operators. It is a modern-day sports betting giant that managed to leverage its digital footprint and its preexisting database of fantasy sports customers into a leading spot in the industry.

Tech in place too

DraftKings already has plenty of tech, some of which was developed in-house and some that was obtained via acquisition from SBTech and Golden Nugget. It created a top-level sports betting platform with clear direction, and it is taking some unexpectedly large strides in the online casino realm too, including a suite of proprietary games and a robust live-dealer product.

The interest almost certainly is not about the PointsBet brand; DraftKings already has one of those too. Five years ago, it was not completely clear whether the fantasy-inspired moniker would stick with sports bettors. It obviously has so far.

PointsBet a difference-maker for DraftKings?

A PointsBet acquisition would not drastically change the share picture for DraftKings, but it might make an impact in a few isolated markets.

In Illinois, for example, that 6% share for PointsBet is smaller than the gap between DraftKings (32.0%) and FanDuel (35.8%) at the top. If all of that PointsBet handle somehow moved over to the DraftKings line, it would become the market leader. There is a similar dynamic in Indiana, where PointsBet’s 2.1% share could swing a very tight race between DraftKings and FanDuel.

DraftKings is already the leader in Kansas and Iowa, and a PointsBet acquisition certainly would not hurt its performance in those markets. FanDuel’s lead is meanwhile safer in some of the biggest states like Michigan, New York, Ohio, and Pennsylvania.

Here’s the breakdown for 2023 between these three brands:

New York33.5%40.9%-7.3%2.0%

You coming with us?

Of course, it would be unreasonable to expect a 1:1 migration of PointsBet customers to DraftKings. Given its position in the market, the majority of PointsBet customers in the US are likely already customers of DraftKings too.

While DraftKings could conceivably grow its market share via this type of acquisition, any measurable increase likely will not stem from this database of PointsBet customers.

For a sense of scale, DraftKings CFO Jason Park said a PointsBet acquisition would have no effect on the company’s goal of being EBITDA positive in 2024.

DraftKings for the block

Given the relative insignificance of the acquisition to DraftKings and an industry-wide hunch that Fanatics could be a disruptor, there may be some defensive tactics at play.

A DraftKings steal would negate those prospective benefits for Fanatics. It would force the newcomer to rely on its own tech, which is based on a modified copy of the widely used Amelco source code.

It would have to forge its own marketing partnership(s) in the digital media space, and it would have to spend millions of extra dollars and months of extra time trudging through the full licensing process in every market it hopes to serve.

It’s up to you, New York

In fact, Fanatics would likely never gain access to the New York market without acquiring one of the existing licensees. PointsBet is one of the lucky nine selected for a license; Fanatics was not.

License caps could also prove restrictive for its path into Michigan, New Jersey, Pennsylvania, and Virginia. On its own, Fanatics would struggle to find a foothold in any of those markets. PointsBet meanwhile serves all of them.

The same thought process holds for iGaming, where license caps also limit the number of available entry points. Michigan, for example, is completely closed to new operators.

DraftKings may therefore see $195 million as the value of simply preventing Fanatics from plucking the PointsBet assets from the bargain bin and sprinting to the checkout line. Rubin certainly seems to think this is the case base on his recent public comments.

PointsBet brand not resonating

For all the reach PointsBet has, the brand is far from ubiquitous in US sports betting.

PointsBet does not have a double-digit share of revenue in any of its active states, nor is it trending toward growth. Illinois represents its best performance, sitting in sixth place out of seven online brands with a share of about 6%, ahead of Barstool and roughly tied with BetMGM.

Beyond that, though, PointsBet’s share of the broader industry sits around 2%.

PointsBet’s US sports betting operation generated a net win of A$50.7 million for H2 2022, up 35% from H2 2021 because of increased margins and reduced marketing spend. Its cash flow is dwindling, though, and executives have acknowledged that the US sports segment will not be profitable in the near term.

Fanatics looking for the fast-track

It is plain to see what Fanatics would gain from this acquisition. Its sports betting product is still in its formative stages, and the addition of PointsBet’s existing tech would no doubt hasten its pace to the finish line.

There is also the market access and absence of upfront fees, with Fanatics seeking to gain an immediate presence in the majority of legalized states. CEO Michael Rubin has publicly maintained the target of launching Fanatics Sportsbook in 12-15 states before the upcoming football season, and there simply is not a way to make that happen via traditional means.

Fanatics would still need to go through a regulatory process if they acquire an existing licensee, but inheriting those PointsBet permits would save millions of dollars and accelerate its timeline by many months. Factor in the NBC Sports partnership along with all that tech and access, and the $150 million price tag seems like a bargain for a billionaire with a new bookmaking outfit that seeks to disrupt the current equilibrium.

Fanatics Casino part of the plan?

There is an iGaming component to consider too, though it has not been at the forefront of the public conversation.

PointsBet is a large, vertically integrated gambling company with a proprietary online casino product that is active in four US states. PointsBet Casino contributed another A$19.4 million to its H2 2022 results in the US, and iGaming seems poised to become the next major facet of expanded gambling.

At this point, every major US online sportsbook is an online casino too and Fanatics’ plans for an online casino product are not exactly a secret. (It says so right there in the name: Fanatics Betting AND Gaming.) They are not talking about daily fantasy sports or League of Legends.

As PlayNJ explored, the PointsBet online casino assets may end up being more valuable for a prospective buyer than the sports betting assets.

The Banach-DraftKings theorem

Industry onlookers see tech as the most valuable part of a prospective PointsBet deal, and it does not have much to do with their proprietary Points Betting product. What really intrigues analysts is Banach, the in-play betting engine that PointsBet acquired in 2021 for $43 million.

Banach is one of the leading suppliers of in-play and prop betting solutions, two categories quickly becoming fundamental to product mix in the US. Investments in these less-explored formats are giving US operators a differentiated product and a wider path to profitability, and Banach is among the best in the world at what it does.

It is perhaps the one PointsBet asset that would appeal to both upstart operators and the established industry leaders alike.

Let’s get nerdy about DraftKings

There is a famous theorem in geometry known as the Banach-Tarski paradox, or the “pea and the sun” paradox. It essentially asserts that a sphere the size of a pea can be broken apart into a non-measurable set of pieces and reassembled into a new sphere as big as the sun. As the authors explained: “Some might find it disagreeable that such sets exist, but that is mathematics!”

It is amusing to think of the pea and the sun in the context of this potential DraftKings deal. Would integrating the Banach tech into the DraftKings platform yield a product that is better than its original parts? Could more bolt-on tech possibly even propel DraftKings ahead of FanDuel and into first place in the US market?

The Banach-Tarski paradox may never be proven, but this Banach-DraftKings corollary is headed toward a resolution on way or another. Shareholders will vote on the proposed transaction this week.