The US market has become the golden goose of the global sports betting industry, presenting itself as the ‘land of opportunity’ for those looking to expand their international footprint.
Strategy expert Anton Kaszubowski – Founder and Managing Director at SBC Advisory Partners – takes a look at why the US market has become a ‘big name game’ and why mergers and acquisitions (M&A) are sweeping across the industry.
Since the fall of the Professional and Amateur Sports Protection Act (PASPA) back in May 2018, all eyes have been on the US market – and namely, the opportunities that this new jurisdiction presents. But could anyone have predicted just how quickly the market would boom?
In the last 18 months in particular, we’ve seen a rise in the number of M&As taking place as market leaders – such as FanDuel, DraftKings and Entain – all seek to take a slice of the metaphorical sports betting pie.
Three years on from the repeal of PASPA, and we appear to find ourselves in the middle of an arms race. Take Las Vegas Sands for example, they’ve got several billion sitting in cash ready to deploy. The chances are that they will go out and make a significant acquisition or a series of smaller to mid size acquisitions and/or strategic investments in order to establish themselves in the market. This suggests that the trend of M&A is far from over.
Currently, the leading US-based betting companies do not appear to be operating with a focus on delivering profitable, organic growth in the near term. I’d go as far as saying that it’ll be years before some of these businesses start to make money.
So how are they acquiring companies if they’re not making money? Good question. If we take DraftKings as an example, we can see that in recent years, they have raised a considerable amount of money. Their market spend is insane, topping hundreds of millions of dollars each year.
The current situation exists because the majority of US-facing online-gambling companies like DraftKings are leveraging their extremely high multiples to grab market share, buy in technology and content.
They need to maintain a strong positive momentum during this golden period of cheap money and when the sentiment of opportunity outweighs the reality that the current business model is unsustainable over the long term.
Essentially, because their money is “cheap”, the operators are buying market share with the view that if they get big enough, fast enough they ensure their position as a significant winner in the market and over time they will grow into their over-inflated valuations. That’s not to say that many of the deals being done don’t make sense from a strategic perspective. DraftKings recently announced acquisition of Golden Nugget is a good example of sound investment.
Valued at $1.56 billion, the takeover has provided an ample opportunity for DraftKings to reap the benefits of the underlying profitability of GNOG’s igaming footprint across states such as New Jersey, Michigan and Virginia while also not putting any major capital at risk due to the all-paper nature of the transaction.
They’re able to spend that amount of money on marketing due to the funds that they have raised. And looking to the future, DraftKings also has the advantage of being able to raise more money simply because they’re seen as a sector winner.
On a personal level, I can say that this strategy is not new and can succeed very effectively. On a much smaller scale it reminds me of the time back in the early 2000s when I was Managing Director of a publicly listed B2B gaming technology business, FUN Technologies.
During a 3-4 year period the company raised multiple rounds of public finance, wooed investors by completing several high profile acquisitions that grew our valuation many tens of times over, only then to be acquired by a much larger company at a strong valuation.
The fundamentals of the strategy we pursued was not much different to those being employed on a much larger scale in the US today, except that the larger operators are not looking to be acquired but to position themselves as one of a few major brands that dominate a very large and long term profitable market.
But what about the smaller companies? Do they stand a chance at being able to jump on the US bandwagon? It’s going to be tricky, to say the least.
As an early investor in Askott Entertainment, which was latterly merged with FansUnite (CSE:FANS), I still follow the stock and was recently listening to an interview with their CEO, Scott Burton, where he explained that realistically it is just too difficult and expensive for the company to enter the States with a B2C strategy. They’re a Canadian, small cap company and as an operator, it’s impossible to enter the US – he said that they just can’t compete. They can only do B2B deals to try to build a footprint.
I think this has very much been a realisation for a lot of the smaller, less well capitalised suppliers. They just can’t afford the market access deals, and then can’t afford the marketing on top of it. The US sports betting market is very much becoming a big name game. Therefore, market consolidation will continue at a pace.
I do think, however, that less well capitalised companies looking to enter the US market should also steer away from deploying a business strategy which primarily revolves around being acquired. First and foremost, you should be looking at creating a sustainable business with a winning expansion strategy and stand-out products should you want to succeed across the pond – not to mention retaining a strong senior management team who can oversee your development. Once this has happened, at least in this frothy market, approaches from potential acquirers will likely follow.
As more states begin to open up to sports betting, and the market begins to settle, I do think that there will be a recalibration and reevaluation within the US. We’re now beginning to see a bigger focus on iGaming – as seen with Penn National Gaming’s acquisition of HitPoint Studios, Inc and LuckyPoint, Inc earlier this year. While PNG has continued to enjoy consistently strong financial results, these acquisitions will undoubtedly be valuable when tapping into new demographics.
I believe that in the coming years, we’re going to see more companies add their own games studios to develop their own content. This is a trend which we have seen in Europe, and the US is firmly heading in the same direction.
As the US unwinds from the pandemic and there is an increased focus on developing new sources of tax revenues, the pattern of iGaming adoption is likely to be even more exaggerated throughout 2022 and beyond. However, legislating iGaming is not likely to be a straightforward process and therefore not as accelerated as the introduction of sports betting in some states.
The pace and success of iGaming legislation will depend on each individual state’s approach to balancing tax benefits against the relative lobbying power of conservative and religious interests as well as tribal interests. Nevertheless, regulating iGaming in response to a declining land-based sector is now a question of when rather than if across the vast majority of the US.
It truly has taken me by surprise just how fast the US market has developed. We all knew that this was a huge growth opportunity, but we’re now seeing the US firmly assert itself as the biggest regulated growth market in the world. And yet we are still just the beginning of this cycle of growth and subsequent market maturation.