Abstract
The flurry of M&A activity that accompanied the second-quarter results in early August was indicative of the extent to which the competitive nature of the U.S.'s sports betting and online gaming sector is already having a centrifugal effect at the top end of the market.
As with the land-based gaming sector, the actual revenues from the listed sports betting and online gaming operators had been pre-figured by the monthly data from the relevant gaming states.
Hence, it was no surprise when, for instance, DraftKings reported revenues rising 297 percent to $298 million or that Flutter Entertainment's U.S. operations saw revenues rise 159 percent to $652 million. The story was repeated throughout the sports betting and online gaming sector. BetMGM (as reported by both joint venture partners MGM Resorts International and UK-listed Entain) saw first-half revenue rise to $357 million; Rush Street interactive enjoyed an 89 percent revenue leap to $122.8 million.
But impressive as these percentage rises were, they didn't grab the headlines. Instead, the corporate news accompanied the results that attracted attention, including two truly indicative pieces of M&A news.
First, we can look at Penn National Gaming's $2 billion bid for Score Media & Gaming announced on the day of its results. On the earnings call that accompanied the results, Jay Snowden, CEO at Penn National, was joined by Score Media & Gaming's John Levy, and Dave Portnoy and Erika Nardini from Barstool Sports, who were all keen to talk about the synergies that would accrue from the deal.
Prime among these synergies, of course, is the tech stack. In what sounded like “fond farewell” remarks, Snowden said third-party partners White Hat Gaming and Kambi had done a sterling job but “at the end of the day, given how important this is to us, we just have to be in control of our tech stack.”
Levy said that having recently launched its own Player Account Management system and with risk and trading coming very soon, theScoreBet platform (based initially on a Bet.works framework) was already “90% under our control” with the final pieces of the puzzle coming within the next year.
This chat promoted a swift response from Kristian Nylén, Kambi CEO, who issued a somewhat barbed statement congratulating Penn National on the deal but warning of the difficulties ahead if it is to sail off on a different platform.
“The entity they have acquired has yet to develop a proprietary sportsbook, and certainly not one to a similar high standard as what we offer,” Nylén said.
More surprising, perhaps, was that the analyst reaction was also mixed. While some lauded the deal as a prime piece of consolidation, others were less convinced that this was the best use of Penn's resources.
Penn permabears Deutsche Bank didn't hold back. “We get that Penn needed a tech stack, but buying a media company for a tech stack, knowing the challenges peers have had buying tech companies with sports-betting tech stacks, seems a bit strange, and frankly, risky,” the team said.
Noting there was no discussion on the call over the actual earnings, despite regional gaming trends being so strong, the team added, “that said, when you pay $2 [billion] and an almost 90% premium to the equity for a bolt-on amenity to a sports and icasino business, to augment a strategy which was billed as requiring little in the way of incremental spend, it likely requires some rationalization.”
Deutsche Bank went on to note that Barstool is achieving only mid to high single-digit market shares in sports betting and is a distant seventh or worse in online gaming. Indeed, the only note of defensiveness from the call came with oblique mentions about market shares. “We're not concerned with where market share has been; we're just concerned about where it's going to be,” said Snowden.
Golden Shot
The Penn-Score deal is but one outward example of the pressure exerted by FanDuel's dominance in sports betting—Flutter proclaimed that it had achieved 45 percent market share in that space in the second quarter.
The second piece of significant M&A involved major rival DraftKings, which laid out circa $1.56 billion on online gaming specialist Golden Nugget Online Gaming (GNOG). 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 i-gaming, but it has not yet reached non-sports fans who are i-gaming 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 percent 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 i-gaming: it's a tremendous opportunity to broaden demographics and deepen market share.”
Macquarie noted that using a market share versus market cap calculation, DraftKings' current valuation implies a market share of 30 percent. The challenge presented by Caesars, Penn National, and MGM means DraftKings' retention tools “will be put to the test.”
This test will be expensive. When Caesars Entertainment reported its quarterly figures, it came one day after it had relaunched its Caesars Sportsbook app following the completion of its acquisition of William Hill.
While CEO Tom Reeg was keen not to make any predictions about market share, he was obviously hoping to make quite a splash with marketing spend over the next two years or more of over $1 billion.
Reeg said the group was “activating the whole enterprise into the vertical,” including the 60 million people in its rewards program database. The “entire workforce has been incentivized to sign up people to digital, and there is a real lean-in to digital.”
Prior to launching the app and Caesars Digital, “the digital business we were doing was incidental and not truly focused, and now we're looking to generate cash at maturity well in excess of 50% of what we invested.”
That they can afford this spend is partly due to the continued recovery in land-based gaming. Deutsche Bank noted that the company produced one of the more “eye-popping” earnings beats in the second quarter. Reeg said there was more to come with third-quarter occupancy rates expected to be “significantly ahead” of Q2 and margin gains to be sustained.
But he added there was room for improvement. “It's an extraordinary amount of EBITDA [earnings before interest, taxes, depreciation, and amortization] that's left on the table,” he said. “(We) had very little group business to speak of, and we're still able to post the best quarter that Caesars had ever posted from an EBITDA perspective.”
The theme of returning customers and improved margins went across the sector. Red Rock Resorts, for instance, reported revenues up 295 percent to $482.2 million, and while this was down 11 percent on the second quarter 2019—the best comparator—property margins were up 450 basis points on the same period two years previous.
“We believe the margins can be sustained within the zip code we are in,” said CEO Frank Fertitta. “We think the costs coming out of the business have been a permanent shift. And every incremental dollar we get through pretty much, the flow-through is incredibly high.
Fertitta went on to say the free cash flow would go towards reducing debt as well as paying for new developments. Deutsche Bank noted the “meaningfully above consensus” figures, and the management comments on the strong visitation trends from younger demographics.
This is The Reit Time
The boom in the land-based sector has had ramifications on the gaming real estate investment trusts (REITs), where the big news came with VICI's acquisition of rival MGM Growth Properties in a $17.2 billion deal.
The deal, which also involves VICI taking on $5.7 billion of debt, will see the company enter a master lease with MGM Resorts International for an annual rent of $860 million. VICI CEO Ed Pitoniak said the agreement provides “large scale, high-quality real estate” and enables VICI to diversify its tenant base, reducing its largest tenant to circa 41 percent from 68 percent currently and opens up the possibility of moving into non-gaming and international growth.
Pitoniak reiterated his belief in the durability of the gambling sector. “Operators have proved the resilience of their business models unlike anyone else in global hospitality and leisure, and that resourcefulness has shown the value of real estate as an investment asset class,” Pitoniak added.
With MGM (and other operators) going “asset-light” and divesting of their real estate, Pitoniak said MGM's “approach gives us great confidence and is reflected in capital spending and commitment to employee engagement and guest satisfaction rates.”