With the dust settling on the recent merger between DraftKings and SBTech, Julian Buhagiar, Co-Founder of RB Capital, offers a venture capitalist view of the situation and how it might develop within the broader US sports betting scenario.
SBC Americas: Regarding the merger, what are the key combination benefits?
Julian Buhagiar: Whilst the news does not come as a surprise, as it’s been over a year in the making, SBTech and DraftKings’ merger is one of the most significant we have seen in the US gambling market. The newly created vehicle is set to become the first vertically integrated sports betting and gambling operator open for business in the US. Assuming share prices remain stable a year on after trading, this deal will prove to be monumental and set a baseline for speculative private equity firms outside of gaming. If successful, it will also prime the market for a follow on of further M&A activity, not unlike what we have seen in Europe already.
SBCA: What does it mean for SBTech’s existing US activity?
JB: Done properly, SBTech’s exposure to the US market is (mostly) still to play for. It does of course remain to be seen what restrictive covenants DraftKings insist on, but for a business that has grown mostly through European and Asian markets, there is significant upside potential for SBTech’s US deal flow.
SBCA: How quickly might this bring an end to DraftKings’ Kambi association?
JB: Perhaps counterintuitively, DraftKings will likely hold onto Kambi for the foreseeable future. In addition to the necessary regulatory and legislative hurdles that still need to be cleared, it is as yet uncertain as to how the technical stack will be integrated. Moreover there will inevitably be a gradual handover process from an incumbent to an (as yet unproven) internal technical infrastructure, so whilst there is an end in sight for Kambi, it won’t be happening anytime soon. Furthermore, DraftKings will almost definitely use the existing Kambi relationship increase their leverage on both SBTech (to expedite the merger), and with Kambi, to continue to receive more favorable deals and support.
SBCA: What sort of precedent does this set for future M&A in the new US market, and where do you see actual innovation and new enterprise value being developed for the US customer?
JB: This is possibly one of the most intriguing aspects of the deal. Given that the merger has only been possible through a special purpose vehicle, it has effectively rewritten the rules for private equity-based gaming acquisition. While this type of acquisition strategy is a popular weapon of choice for private equity (and sometimes larger VC) based institutions stateside; it hasn’t really been used for gaming to date.
As a consequence, I have no doubt it can – and will – incentivize entities who have not been privy to the gambling industry to dip the proverbial toe into these waters. We’ve already seen TPG and Avista incentivize mergers in a similar manner, and it’s likely to bring even more players to the M&A table this year.
SBCA: Could companies come to regret early M&A movements before state markets mature?
JB: As always, early movers are risk makers – so there will always be a higher likelihood of collapse at such stages given free market forces.
However, this is not an uncalculated move; arguably, given that the makings of this deal have been in the works for over a year, this potential acquisition has had its market sentiment tested many times through well-placed PR statements. How investors will react to the merger once shares are publicly traded will be a different matter; though by then it will be less due to the state of the market and more due to the actual dynamics of the two companies’ integration together.
SBCA: And to round things off, any US market predictions / likely landmarks for 2020?
JB: Expect quite a few more (admittedly lower-cap) acquisitions of this nature, likely not through special purpose acquisition companies (SPACs), but directly funded by either buyers or a single private equity backer. Data-centric player companies will be ripe for buying this year, followed closely by a few more brand and tech-based mergers once the new DraftKings Inc entity stabilizes on the stock market. Though by then we’ll be well onto 2021!