Tottenham Report: DraftKings-Entain, 888-William Hill — Two acquisitions evaluated By Andrew Tottenham, Managing Director, Tottenham & Co September 27, 2021 at 10:00 pm In the last few weeks, we have seen two large transactions proposed in the online gambling industry: 888’s acquisition for £2.2 billion of the non-U.S.-facing part of William Hill and DraftKings’s £16.4 billion offer for Entain. Both of these companies state they are making these acquisitions for similar reasons, but they are not coming from the same starting position. DraftKings and 888 know that in today’s world of online gambling, you need scale to compete. As regulation tightens, which it has done in some countries and inevitably will do in others, the cost of doing business increases and therefore scale becomes all the more important. 888 is a very small player in the U.S. market; its B2B poker offering and B2C sports betting and casino products generated just £73 million in revenues last year. By contrast, DraftKings is on target to generate more than £900 million in revenues this year. The U.S. represents an exciting opportunity for established online-gambling companies. Estimates of a market run as high as £30 billion by 2025, though I’m dubious of the total. In the meantime, no company operating in the U.S. is seeing a positive return on its operations there. Red ink is everywhere. DraftKings, founded in 2009, is no different. Despite revenues of more than £800 million, the company has never made a profit and looks on track to lose over £800 million this year. It is one of those companies where, as revenues go up, losses increase. Yet it has a market cap of over $20 billion. Online-gambling operators in the U.S. are awash with cheap money and are throwing it at potential customers in order to gain market share. But customers are promiscuous; turn off the promotion and they go to an operator willing to keep buying business. Media reports trumpet record amounts of handle in state after state, but do not point out that quite a lot of this is the operators’ own money. You can throw money at markets for only so long before investor confidence drains and you run out of cash. DraftKings wants to survive the brutal war and be one of the last companies standing, with competitors either having been acquired or forced to the wall. At some point, DraftKings will either have to make a profit or show that it has a clear path to a profit and demonstrate that it’s on that path. Otherwise, its investors will lose faith. I think this was in CEO Jason Robins’ mind when he was considering the acquisition of Entain. If you cannot find a quick way to become profitable and you still have investor confidence, buy a large company, especially if it’s a competitor, with positive cash flow. By acquiring a business with strong cash flow (Entain’s EBITDA was £843 in 2020, with an EBITDA margin of 30%), DraftKings will ensure it has deep enough pockets to survive a long drawn-out battle. What will happen with BetMGM, a joint venture between MGM Resorts and Entain? This has the potential to become messy. Given CEO Robins’ strategy of doubling MGM’s previous offer for Entain to blow any competing bids out of the water, a counterbid from MGM is extremely unlikely. I think it more likely MGM will buy themselves out of the JV as a condition of approving the transaction, which MGM says it has the right to do under the joint-venture agreement. The consideration paid by MGM could help defray some of the Entain acquisition cost. 888 is also acquiring a business that is cash flow positive; William Hill’s 2020 EBITDA was £147 million, but the retail division was badly impacted by COVID. However, the similarity ends there. 888 is profitable and has been for many years; its 2020 EBITDA was £121 million. By buying William Hill, the company adds a depth of online and retail betting expertise to complement its undoubted online casino proficiency. The combined company has the free cash and the betting knowledge to compete effectively in the U.S. Betting expertise is critical, because few states are legalising online casino games. The emphasis is mainly on sports betting. An additional benefit is the number of people employed by William Hill. As companies expand, they require people. Although the number of countries in Europe allowing online gambling is not expanding, the U.S. and potentially South America represent significant growth opportunities. The new 888 will have the human capital to expand rapidly in new markets as they open up. Much has been made of the savings to be made through synergies. Synergies! That all-important word that can be used to overpay for a business. In this case, 888 expects to save £78 million per year at the end of five years. I have yet to see a company that fulfils its synergistic expectations post acquisition or merger. But in this case, if 888 were to stand still and not expand, it does appear to be an achievable target. This acquisition allows the new 888 to pursue a multi-brand strategy. It is very difficult and costly to build a single brand in today’s world. Though Bet365 has managed it, it started in a different time. DraftKings is attempting to do it, but is burning through £1 billion a year in order to do so. 888 is acquiring market share in all of its major markets and should be able to cycle its customers through its brands in order to retain them. The acquisition of William Hill’s non-U.S.-facing business does not increase the geographical diversification of 888’s online revenue streams. True, it will take the company from 85:15 casino/sports betting to 70:30, but online revenues emanating from the UK will increase from 39% to 52% of total online revenues. This is quite a risk, when you consider the potential downsides from the 2005 Gambling Act review. There are five main points in this review: a statutory levy, sponsorship and advertising restrictions, an independent ombudsman to adjudicate customer complaints, maximum bets per spin, and mandatory deposit limits and affordability checks. I think the industry can live with a statutory levy and an independent ombudsman. Restrictions on sponsorship of sports teams is similarly uncontroversial, though maybe not for the sports teams. Advertising restrictions will hurt, but will mainly reduce smaller or start-up companies’ ability to compete and gain market share. The two big issues are monthly deposit limits with affordability checks and a reduced maximum bet per spin. One could argue that if there are affordability checks, why would you need to reduce the maximum bet per spin? With either of these, if the level is set too low — and remember, the Gambling Commission has proposed a monthly deposit limit of £100 — at this level, the impact could be devastating. In the future, I would expect to see 888 acquiring more market share and adding brands to its portfolio. If DraftKings’ acquisition of Entain goes ahead, I expect it too will be hunting for other brands.