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What are the implications of DraftKings' acquisition of GNOG?

What are the implications of DraftKings' acquisition of GNOG?

It has been a year for Jason Robins so far, who, you could be forgiven for thinking may have had a career as a firefighter in a past life. The close of 2021 saw DraftKings’ share price take a significant hit - one beyond all logic when weighing up all of the potential contributory factors.

CEO Robins has over the last few months managed to at least fan the flames with confidence restored among investors, following a number of changes throughout the company.

They did not do themselves any favours, at least with their overly-ambitious attempt to acquire UK conglomerate Entain in the Autumn of 2021. A staggering $23 billion bid was swiftly withdrawn. It screamed a number of things, not least of which being confusion.

Perhaps substantially underestimating DraftKings rivals’ MGM Resorts International and the influence that they had to stall any potential deal was no doubt one area where DraftKings tripped up. A joint-venture between MGM and Entain; BetMGM, launched in 2018, was well on its way to becoming a force to be reckoned with in the swiftly growing US market.

The likelihood of MGM wanting to relinquish control was slim under any circumstances and suggested undertones of naivety in the DraftKings bid. Effectively, the firm realised its mistake too late, pulling out after a couple of weeks, claiming it ‘dead in the water’.

In the weeks that followed the stock price tumbled, arguably compared to a ‘vote of no confidence’ from shareholders, at a time when the US sporting calendar was at its busiest. The NFL, NBA and NHL seasons were all in full swing, with bettors ramping up their interest and operators pushing promotions left and right.

Golden Nugget to Provide the ‘Golden Goose’?

After much speculation that DraftKings was still in the market for an acquisition in order to provide it with a scaleable asset, the takeover of the online division of Golden Nugget - Golden Nugget Online Gaming (GNOG) was completed for a relatively modest $1.56 billion.

There are perhaps a number of advantages to this deal - surprisingly for both sides. DraftKings anticipates that it will save in excess of $300 million in costs, due to the fact that it brings all technology in-house, enabling it to scale at a much faster rate in addition to improving efficiency. 

Tilman Fertitta, owner of Fertitta Entertainment, the holding company that owns Golden Nugget (both the land-based operation and originally GNOG), has retained shareholdings of GNOG and will be a major influence in DraftKings’ direction. In addition, he has also joined the DraftKings board - another coup for the US sportsbook.

The opportunities that can come from this for both brands are extensive. Fertitta also owns NBA basketball franchise, the Houston Rockets, which means that this will provide DraftKings with a natural and convenient marketing channel. It means that DraftKings has become the exclusive daily fantasy, sportsbook and casino betting partner of the Houston Rockets.  

Fertitta revealed at the time: “This transaction will add great value to the shareholders as two market leaders merge into a leading global player in digital sports, entertainment and online gaming. Leveraging Fertitta Entertainment’s broad entertainment offerings and extensive customer database, coupled with DraftKings’ mammoth network makes this an unbeatable partnership.

“Together, we can offer value to our combined customer base that is unparalleled. We believe that DraftKings is one of the leading players in this burgeoning space and couldn’t be more excited to lock arms with Jason and the DraftKings family across our entire portfolio of assets, including the Houston Rockets, the Golden Nugget Casinos and Landry’s vast portfolio of restaurants. This is a strong commercial agreement for both companies.” 

Furthermore, the sheer presence of Golden Nugget’s land-based empire means that entering new states will make it easier for DraftKings to secure permission - to have a natural land-based partner. 

Should Golden Nugget decide to build (or likely acquire) new casinos in other states - even those as yet where iGaming is prohibited, could be a great market entry for DraftKings - especially in California which will vote on whether to pass iGaming legislation in November. 

Robins has also been particularly vocal about this partnership enabling DraftKings to win a larger share of the online casino market - an area where they are playing catch-up to the likes of FanDuel and BetMGM.

“We definitely feel in the iGaming segment that we do better with people who are sports fans, that we can cross-sell, and we’ve been working hard to try to extend our brand and extend our reach into the non-sports fan iGaming audience,” Robins said.

Is DraftKings worth the gamble?

From a share price perspective, this deal definitely demonstrates a certain amount of hidden value especially for any investors looking to make a potentially explosive return. Robins has been adamant since his company’s share price started to plummet that those who sold shares would regret it.

Speaking via Twitter in March, Robins stated: “If you sold #DKNG today, just be aware that my team and I are on a mission to make you regret that decision more than any other decision you’ve ever made in your life.”

Having been downgraded by investment fund Argus from a ‘buy’ rating classification to a ‘hold’, this also did little to inspire confidence in the market. That being said an analyst at the firm predicted a particularly difficult 2022 for the operator, due to “an increasingly difficult online gambling landscape”.

Despite this it is hard not to think that there is perhaps some short-sightedness, especially following the linkup with Golden Nugget, which will not only add to the bottom and top lines but also provide a valuable ally from a growth perspective. 

The biggest priority for DraftKings is making sure that it can adequately segment its marketing state-by-state over the next 12 months, with one of the reasons for Argus’ downgrade decision blamed on a significant over-spend that failed to pay off. 

With GNOG now under its umbrella, this should help to alleviate some of the pressure on online casino marketing spending - as this is already a notable brand in its own right in this space with a loyal following of customers.

Getting its sportsbook offering right is one area that will need to be thought through. With BetMGM and FanDuel ahead of DraftKings and other brands catching up, it will, no doubt, already be working on ways to increase its market presence.

As to whether it is worth buying DraftKings shares at such a low price, there are certainly a lot of positives to be taken from the Golden Nugget alliance - Argus could change its rating at any time. Robins will hope there is plenty of hose left before that happens.

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