Have we reached the next level of sector consolidation?

If we thought we’d seen the end of the mega-mergers, the US market showed us we were very much mistaken. DraftKings’ $20bn bid for Entain sent shockwaves around the sector and would potentially set a new standard for scale in online gambling, as well as re-centre the balance of power firmly on the western edge of the Atlantic Ocean. While Flutter is already at a similar scale to the proposed combination, nobody else really comes close. I’ve started to lose count, but this is something like egaming 4.0. A new era. Possibly a new error? Maybe both. Strategically, it’s a paradox. It makes total sense but is also total nonsense. It’s one of those deals that starts to hurt your eyes if you look at it for too long and makes most sense if you just glance at it quickly and take in the big picture. Combining the second largest, but most geographically diverse, European online gambling operator (forget about the shops) with the second largest US online gambling operator creates a new market leader with…um…no real material advantage over Flutter. Right. That’s a bit annoying, isn’t it? Flutter’s H1 2021 revenue from online was £3bn, with EBITDA of £636m, while Entain’s H1 2021 revenue was £1.6bn from online with underlying EBITDA of £496m. DraftKings’ first half revenue was $610m (£450m) and it posted an EBITDA loss of $235m so the combined entity comes in at £2.1bn with some friendly rounding up and with EBITDA of £323m. In other words, two-thirds of the size in revenue and about half the size of Flutter in terms of EBITDA. That doesn’t automatically feel like a world leader.

What’s in it for DraftKings?

This is where the deal really makes sense, and if you can force your perspective to be solely looking out from a Boston office block then you can start to sell yourself on the value creation of the acquisition. Pretty much everything DraftKings lacks it can find in Entain, and a bit more besides. On the other hand, if you feel DraftKings has sector leading visionary senior executives and a stranglehold on the goodwill from the US stock market to maximise value of any assets brought under its wings, you can quickly get from ‘good grief, this is terrible’ to ‘good lord, this is genius’. There is a lot to unpack there, so let’s quickly zip through it. DraftKings lacks international reach, which Entain brings in spades, not least in terms of key expansion territories in Canada and Brazil, but also in core regulated European markets and Australia. DraftKings lacks deep online gambling experience and, again, Entain has that in spades from the top down. It also lacks online casino and poker expertise and Entain has bucketloads of both including good brands, an enormous in-house content library and poker, bingo and casino platforms. So DraftKings becomes a global multi-vertical online gambling leader overnight, and in return bestows onto Entain its laser-sharp vision for expanding into media, NFTs and a bunch of other digital gaming and entertainment categories you likely haven’t even thought of yet. And all this at a very friendly US stock market valuation multiple. In some ways this is both a statement of intent and an admission of defeat. It feels as if the deal makes strategic sense; it’s just that DK is saying, “Yeah, we can’t do this on our own and the SBTech platform isn’t good enough and we can’t do international growth”. But as with everything for DraftKings, now is broadly irrelevant. The entire business is a huge bet on the future of US online sports betting, US online casino and the synergy of both of those things with the wider sports, media and entertainment landscape. Bringing Entain along now just skips a few stages of the growth plan. And that is a pretty compelling strategy if you can overlook the enormous challenges around integrating the various teams, platforms, brands and technologies. But those are solvable problems.

What’s in it for Entain?

On the other hand, on the face of it, there is not a great deal here for Entain. They are bringing the revenue, profitability, all territories outside the US, a decent chunk of the US business, much of the technology, many of the brands and most of the online gambling experience. DraftKings, on the other side, is bringing a strong US brand, a high stock market valuation and a DFS business. You could argue that this is Entain taking more control over their US destiny, rather than being tied to a partner in MGM which will always want to have the upper hand and, ultimately, full control of that business. But selling out earlier to someone else feels an odd way of doing this, and really what you are assessing is will the DK + Entain combo be more powerful and gain larger share than Entain + MGM. On the face of it you would think the answer to that is probably yes. DraftKings has a huge leg up into the US market through an existing sports betting business in all but legal status, a large player base who already have payments as part of their accounts and a brand that had hundreds of millions spent on it in the prior five years. Those advantages have been parlayed into both a substantial sports betting business and a high-profile corporate entity that is now considered a key player by most stakeholders. If nothing else, it will likely bring a lot more to the party than MGM. And as the deal is mostly in stock, not cash, this isn’t a cash-out opportunity at peak market froth for Entain shareholders, it’s more of a longer-term bet on the future of the combined entity. What it would be, however, is an “easy” route to relisting in the US and realising the accelerated valuation multiples that listing would bring to any US-facing business. How US analysts would view the likes of the UK, Germany and the Netherlands is another matter, and one for another day.

What does it mean for everyone else?

This is much harder to call. There is a clear argument that the deal will create the duopoly DraftKings has been promising since it first launched in the US sports betting sector, with the Boston-headquartered operator and FanDuel at a level above the chasing pack in terms of scale and resources. This is both a threat and an opportunity for other operators with the integration of two large, very different businesses with a mass of platforms and operational structures to resolve likely to act as a distraction in the near term. Online gambling moves quickly, and a year lost takes a lot longer to pull back, and you only need to look at some of the Flutter and Entain brands for evidence of this in the past. Flutter itself, while well placed, has arguably still got a big job ahead of it maximising synergy benefits of its various brands, and its platform piece is far from complete even now. It’s still a rebuilding process and a corporate culture that is increasingly M&A and stock market valuation driven isn’t always a help in that regard. Sometimes the boring stuff is the most important, but the least attractive to investors. As such it feels unlikely DraftKings would look to change too much about Entain’s international business in the short-term, possibly launching the DraftKings brand in some territories over some Entain brands, but you sense a gentle hand on the tiller here to avoid value destruction. So, largely it would likely be no big change, and possibly a slight positive for Entain competitors due to the leadership team distractions. But there is no doubt the US is where things would really be shaken up. Would a combined DraftKings and Entain be able to take out FanDuel for top spot in sports betting, and would it be a real contender for a clear leader in online casino? Both feel at least possible and perhaps even probable. There is a lot of talent in both entities and no shortage of ambition on either side. How MGM fits into all this remains to be seen, and this doesn’t feel like a simple integration by any means, but if DraftKings can pull this off there is no doubt life will get a lot tougher for everyone in the US. As if it wasn’t tough enough already…