DraftKings Offers $1 Billion In Convertible Notes

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Friends,

DraftKings, the leading daily fantasy sports contest and sports betting operator, announced yesterday that they are raising $1 billion through convertible notes.

The interesting part?

They already have plenty of cash on hand, ending 2020 with $1.8 billion in cash on their balance sheet.

So the real question becomes: What do they need it for?

Today, we’ll run through it.

Here’s how I think about it…

The race for customer acquisition within the U.S. sports betting market has become extremely expensive. Operators like DraftKings and FanDuel typically spend a few hundred dollars to acquire a customer. While that might be considered extremely high for your typical consumer goods or retail company, when your future customer's lifetime value is a few thousand dollars, it makes much more sense.

Put simply, in an increasingly crowded marketplace, where states are being legalized individually over time, sportsbooks are quite literally giving away “free money” for you to sign up.

So maybe DraftKings is simply looking to raise additional capital to fill the deep pockets necessary for future marketing and promotional activities as state legalization expands. To be fair, the convertible note market is extremely cheap right now, and as they say, the best time to raise cash is when you don’t need it.

Or maybe it’s something else…

Penn National Gaming spent $163M for a 36% equity stake in Barstool Sports last year, with the opportunity to acquire a majority stake over time. That has quickly turned into one of the best acquisitions of all-time. Penn National has transitioned from a “little-known but profitable regional casino operator into a digital-first media and online betting powerhouse” (Source).

Just take a look at their stock price, which has ascended from $8 to $136 over the last year. — a new all-time-high.

That’s amazing.

While Dave Portnoy’s social media marketing is certainly helpful, Barstool’s true value was in their audience.

Sports Betting Audience (Aged 21-34)

Barstool: 12 million

FanDuel: 8 million

DraftKings: 4 million

Furthermore, I think this chart explains all you need to know from a brand awareness standpoint (Source).

Can you guess when Barstool got involved?

So what’s my point?

After seeing the success that Penn National had acquiring customers through digital media vs. alternative options like linear television, DraftKings might now be looking for similar rocket fuel.

As for who that might be, your guess is as good as mine.

Score Media and Gaming ($SCR) — popularly known as theScore — has a large digital media platform, is already Canada’s largest sports betting company, and just went public at a $1.8 billion valuation. Not to mention, among multi-sport news and data apps, theScore was the 3rd most downloaded mobile app in North America last year (Source).

A sports betting company with an existing digital audience and growing distribution?

That’s certainly a deal that might make sense, and with Score Media and Gaming’s stock jumping more than 6% on acquisition rumors earlier this month, it appears investors believe there is a chance it happens.

In the end, the name of the game is customer acquisition. With similar technology and few true competitive advantages, tomorrow's sports betting winner is acquiring their customers for less money today.

Penn National Gaming has benefited from a first-mover advantage, but as others look to replicate their success, it becomes more about picking the right partner — not just any partner.

Have a great day, and we’ll talk tomorrow.

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