DraftKings Spends $1.5 Billion On iGaming Business

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Hey friends,

Looking to expand their nascent iGaming business, DraftKings announced an agreement to acquire Golden Nugget Online Gaming in an all-stock transaction yesterday for $1.56 billion.

DraftKings ($DKNG) shares were moderately higher on the day (1.5%), while Golden Nugget Online Gaming ($GNOG) saw its stock shoot up 51% to end the day at $18.50.

As part of the transaction, DraftKings will form a new holding company called “New DraftKings,” which will be renamed DraftKings Inc. when the deal closes in the first quarter of next year.

DraftKings has been spending a lot of money lately. They purchased sports betting media network VSiN for $70 million in March. They spent an additional $50 million on the exclusive rights to Dan Le Batard’s podcast shortly thereafter, and they also announced a massive 5-year, $350 million partnership with the UFC.

The result? The sports betting business tripled its second-quarter revenue to $298 million, quadrupled its monthly unique paying users from 295k to 1.1 million, and saw its monthly revenue per user also shoot up 27% to $80.

Still, the company is on track to lose more than $1 billion this year after reporting a net loss of $305.5 million last quarter. A company operating in the competitive sports betting market is valued at $21 billion despite losing more than $1 billion annually? A value investor might call that insane, but that’s just how these businesses operate right now.

With limited opportunity to arbitrage profit through superior technology, sportsbooks in the United States are incentivized to spend money on customer acquisition aggressively.

That “land grab” strategy has worked for DraftKings. As a result, their sportsbook is growing and is currently live in 12 states representing 25% of the US population.

However, the long-term strategy for most online sportsbooks has always been to eventually convert sports betting customers into online casino customers, or “iGaming” customers.

Why? Because incentives drive the world and online slots, blackjack, and poker offer much more economic upside than traditional sports betting. They have higher margins, offer more predictable cash flows, and greatly expand the lifetime value of an individual customer — which eventually makes operators much more profitable.

DraftKings says the deal will provide them with more than 5 million new customers, could potentially create $300 million in synergies, and offers lucrative marketing opportunities across (former) Golden Nugget’s owner Tilman Fertitta’s portfolio of companies (Landry’s, Houston Rockets, etc.)

Some experts are claiming this acquisition was a steal, while others are saying DraftKings overpaid. Truthfully, with all the nuance and varying economic opinions, it’s typically much better to just let the free market decide that over time.

As for myself, I’m much more interested in watching how the fantasy sports, sports betting, and iGaming industry continues to consolidate over time.

Have a great day, and I’ll talk to everyone tomorrow.

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