The long-rumored tie-up between DraftKings and sports betting technology provider SBTech is finally happening with a public listing the cherry on top.
The merger gives the combined company a leading sports betting brand in DraftKings and a technology platform in SBTech. The deal should close sometime in the first half of next year.
“I look forward to building significantly upon our goals of continuing our state-by-state rollout and creating the most entertaining and engaging customer experiences for sports fans globally,” said Jason Robins, DraftKings CEO.
This deal only comes as a surprise if you missed Legal Sports Report‘s coverage in June when multiple sources said DraftKings was closing in on an SBTech acquisition.
Transaction details for DraftKings going public
DraftKings and SBTech are technically being acquired by Diamond Eagle Acquisition Corporation. It’s a special-purpose acquisition company that’s already publicly listed on Nasdaq.
Diamond Eagle will, naturally, change its name to DraftKings once the transaction closes. A new ticker symbol will also be used.
The combined DraftKings is receiving a $304 million investment from institutional investors. The company will have a market cap of $3.3 billion with more than $500 million in unrestricted cash after the transaction.
DraftKings, SBTech combination benefits
DraftKings outlined a couple of areas that show why merging with SBTech makes sense in the investor presentation.
The bigger company gives DraftKings the ability to innovate products more freely with unique betting markets. SBTech’s risk management tools will lead to better odds and, therefore, more revenue.
It also de-risks the operations of both companies significantly. DraftKings’ revenue is almost completely dependent on the United States while SBTech is more European. Diversifying revenues means the company can take more chances.
DraftKings also no longer relies on a third-party for critical functions. The company’s platform is currently provided by Kambi.
Bringing that technology in-house gives DraftKings more control over how the platform performs and what exactly it can do. It also means keeping more of its profits.
Not just about sports betting: Also online casino
DraftKings is thinking bigger than sports betting with this move.
This is also about online casino, which is a gigantic revenue opportunity through cross-selling from sportsbook.
DraftKings thinks annual revenue could be anywhere from $2.9 billion to $4.7 billion based on sports betting and iGaming revenue projections from the investor presentation.
DraftKings had 14% of New Jersey’s iGaming market share in September despite what it called very little marketing spend. And nearly all of its iGaming customers (98%) have been cross-sold from other DraftKings products.
DraftKings gives NJ gambling details
The investor presentation provided a breakdown of online sportsbook revenue in New Jersey from September 2018 through this September.
- DraftKings took 37% of that revenue, or $75 million. That’s just behind FanDuel Sportsbook at 40% with $81 million.
- William Hill is a distant third at 14% and $28 million in revenue.
- PointsBet accounts for 4% of the market with $9 million in revenue, DraftKings estimates. Fox Bet and bet365 both accounted for $3 million while Golden Nugget and BetMGM accounted for $2 million.
The journey from startup to public company for DraftKings
DraftKings going from fantasy sports operator to publicly traded gambling company was never exactly destined to happen, although going public was always one of the desired endgames.
The company was founded in 2011 as a competitor to early daily fantasy sports mover FanDuel.
It rose quickly from a small startup in Boston to a major player in the burgeoning DFS space. In 2015, it raised $300 million, part of the giant amount of investment money poured into the company over its history.
But by the end of that year, legal questions for the DFS industry started to make an impact on the business, including a battle in New York that would play out over the next year. Eventually, DraftKings and FanDuel would get laws passed in about 20 states, but not before the potential future growth of the industry and the two companies came into question.
Then, DraftKings and FanDuel got the shot in the arm each needed: the Supreme Court decision allowing for the expansion of sports betting beyond Nevada. DraftKings had been working on a sports betting platform with Kambi for about a year in preparation for that rulling.
That helped DraftKings be to market quickly in New Jersey, the first new state to open up online betting. It quickly took (FanDuel was acquired in 2018 by Paddy Power Betfair, now Flutter, and has become one of the early leaders in the US sports betting expansion.)
Since then, DraftKings and FanDuel have enjoyed a massive lead over other online betting brands in the US.
Questions and answers about the DraftKings deal
The deal creates a lot of questions, some of which have answers and others don’t.
Where does this extend DraftKings brand?
SBTech is a bit of a powerhouse when looking at its more than 50 partners in more than 20 regulated jurisdictions:
- 15 European countries including the UK, Ireland, Sweden, Denmark, Poland, Romania, Cyprus, Greece, Malta, Italy, Spain, Gibratlar, Portugal, Belgium and the Czech Republic.
- Three Asian countries including Armenia, Azerbaijan and Georgia.
- Five jurisdictions in North America including Arkansas, Mississippi, New Jersey, Pennsylvania and Mexico. SBTech also powers the Oregon Lottery’s Scoreboard mobile sports betting app.
Smart money also has DraftKings continuing to be a business-to-business provider and not just a consumer-facing platform, with the addition of SBTech.\That’s clearly bad news for Kambi, which extended and expanded its agreement with DraftKings in August. Kambi’s Stockholm-traded stock fell more than 30 percent today.
What does this mean for DraftKings and Kambi?
That’s clearly bad news for Kambi, which extended and expanded its agreement with DraftKings in August. Kambi’s Stockholm-traded stock fell more than 30 percent today on the news.
Kambi will be out of the mix, eventually, but not until SBTech is successfully. Here’s Robins talking about the deal, briefly mentioning the status of Kambi:
DraftKings is going public, and it’s forgoing the typical IPO process. Here’s what you need to know about the fantasy sports company’s new 3-way deal. https://t.co/BWbAXDT3Jo pic.twitter.com/8GsRdImyw9
— CNBC (@CNBC) December 23, 2019
What about BetAmerica and Churchill Downs?
This creates a bit of uncertainty around Churchill Downs’ BetAmerica brand.
SBTech provides iGaming and sports betting platforms to BetAmerica in Pennsylvania, New Jersey and Mississippi. The brand was also cleared to launch next week in Indiana.
The details of the agreement aren’t public, but SBTech called it a long-term agreement when it was announced in May 2018.
Is DraftKings a good stock to buy?
LSR is not here to give you investing advice. However, DraftKings and Robins emphasized in the presentation and the ensuing investor call that it is a “pure play” online gaming company.
The opportunities to invest in a company that is focused mostly on the US sports betting and online gaming market — despite SBTech’s international business — are almost nonexistent.
- Many of the companies with major designs on the US market have substantial European and international business — like Flutter and William Hill.
- Larger casino companies like MGM Resorts and Caesars International will be involved heavily in sports betting and iGaming, but investments in those will come with their land-based operations, where most of their revenue is derived.
PointsBet is one of the few other so-called pure plays in the US.
So, while we’ll not make a value judgment on the stock, if you want to have a financial stake in the future of US sports betting, DraftKings will fit that bill.
Dustin Gouker contributed to this report.