DraftKings + SBTech = US sports betting powerhouse?

What Does The DraftKings-SBTech Deal Mean For US Online Gambling?

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This year, DraftKings will become a publicly traded corporation.

On December 23, the gambling revealed that it would be simultaneously going public in 2020 and merging with sportsbook technology provider SBTech. Rumors about the deal had been circulating since the summer when Legal Sports Report first uncovered the possibility.

The deal is being executed through a third company, Diamond Eagle Acquisition Corp., which will acquire both companies and change its own name to DraftKings. According to DraftKings, this new, public company will thereby become the first vertically integrated sports betting and online gambling operator based in the US. Another company, Newgioco Group, disputes that, claiming that the honor belongs to them. Regardless, DraftKings will be if not the first, then certainly the largest.

DraftKings has spent hundreds of millions of dollars advertising itself over the years, making itself familiar to almost everyone in the US with an interest in sports or gambling. SBTech may be an unfamiliar name to many, though, and Diamond Eagle almost certainly is.

What is SBTech?

SBTech is a business-to-business company serving the gambling industry.

Its primary product is its award-winning sportsbook, though it also has a casino and virtual sports platform called Chameleon360. Through that, SBTech provides services like analytics and chat support. The platform also serves as a gateway for payment processors and third-party developers of the games themselves.

SBTech a moderately large company, with six European offices and another in Israel. Its presence in the US is limited so far, however. It is part of the BetAmerica product in partnership with Churchill Downs, offering retail sports betting kiosks in five states.

For the time being, BetAmerica’s online sportsbook is only available in New Jersey and Pennsylvania. It should additionally roll out in Indiana later this year under the license of Rising Star Casino.

What is Diamond Eagle Acquisition Corp.?

The third company involved in the deal is Diamond Eagle, which is what’s known as a special purpose acquisition company. These SPACs can be thought of as being akin to the surprise grab bags of the investment world.

A SPAC is a company with minimal staff and no operations which exists for the sole purpose of finding another company to buy. Investors pool their money, then take the new company public to sell additional shares and raise additional capital. Finally, they look for a suitable entity to buy with all that money, usually a private company which can become public as part of the deal. It’s not necessarily known at the time the money is first raised what company is ultimately going to be purchased.

In this case, the deal is more of a reverse merger than an outright purchase. Diamond Eagle’s institutional investors will invest $304 million in the new company, but its estimated market capitalization will be $3.3 billion. Ownership of the new company will therefore still rest in large part with the original owners of DraftKings and SBTech.

This is similar to how Amaya — later known as The Stars Group — acquired PokerStars in order to take it public in 2014. The only difference is that Amaya was a developer of online casino software and had its own operations prior to the deal, unlike Diamond Eagle.

The same investors behind Diamond Eagle previously attempted to orchestrate a similar deal with FanDuel using another company called Platinum Eagle Acquisition Corp. When that failed to pan out, Platinum Eagle acquired Target Logistics Management instead, a company focused on building modular housing for oil, gas, and mining operations.

Stock market responds

Diamond Eagle’s stock ($DEACU) had already been on the rise since Bloomberg published rumors of the deal on October 30. Between then and late December, shares rose from just under $10 to around $10.50 apiece. Official confirmation of the deal on December 23 caused a much bigger and more sudden jump, with share values rising 12% to a peak of $11.85 before settling back down.

The biggest financial impact of the announcement wasn’t on Diamond Eagle’s stock price, however. The most dramatic effect was on the stock price of DraftKings’ current sportsbook platform provider, Kambi.

Kambi’s shares had already taken a hit in early December when Anders Ström, a member of its Board of Directors, sold off 1.3 million of his own shares, dropping their price from SEK 195 to 174 ($20.82 to $18.58).

Upon word that DraftKings would be merging with SBTech, Kambi stock plunged below SEK 120, its lowest price since early 2018. It has since recovered somewhat to about SEK 134 at the time of publication.

Switch from Kambi will happen, but when?

Kambi and DraftKings signed a renewed deal this fall, and the latter hasn’t yet given Kambi notice of termination. However, in describing the new company as “vertically integrated,” DraftKings is strongly hinting that it plans to switch to SBTech’s platform at some point in the future.

Additional confirmation of a future switch to SBTech’s platform came in the slides accompanying DraftKings’ announcement of the deal. One of these lists several advantages of SBTech’s technology over Kambi’s:

  • Trading & risk management tools
  • Bespoke risk & liability strategy
  • Superior platform
  • Casino integration
  • Managed services

Upsides a’plenty for DraftKings

Naturally, a change in platform isn’t the main reason for the deal. That would be possible without the need to merge the companies. Rather, it’s just one positive side effect.

For DraftKings, the motivation is likely twofold.

  1. Owning its own platform by way of SBTech as a sister corporation is likely to bring cost savings down the road.
  2. It will allow DraftKings a degree of customization that it might find difficult when using software provided by a fully independent third party.

The US market is shaping up to be extremely crowded and competitive, and DraftKings is clearly looking for ways to differentiate itself.

In Pennsylvania, for instance, DraftKings Casino has enlisted the help of Evolution Gaming to build its own custom live-dealer studio instead of using an off-the-shelf service. It has also set up its own startup accelerator, Drive, to foster innovation.

Having SBTech in house may give DraftKings more freedom to create a unique platform with enticing features unavailable to competitors reliant on third parties.

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Access to capital is critical

Most of all, though, the deal is about securing liquid capital. It creates a short-term cash infusion to the tune of $500 million from investors and Diamond Eagle’s cash reserves.

In the long term, going public means the ability to raise additional funds. If DraftKings needs more liquid capital down the road, it can simply issue new shares. That’s easier than seeking out private investors.

Having that money on hand is key at this time when the US market is rapidly expanding. Each new state that opens up is an opportunity DraftKings won’t want to wait on. However, each of those opportunities also means new expenses in terms of licensing, setting up new servers, customer acquisition, and so forth.

Most of DraftKings competitors are publicly traded or owned by publicly traded corporations. Remaining private might have put DraftKings at a long-term disadvantage in terms of spending power.

A win-win-win proposition

Naturally, the other parties involved in the deal get something out of it as well. The investors who formed Diamond Eagle have found their way into the US online gambling market, which has obviously appealing upside.

They could simply have bought shares of The Stars Group, Flutter, GVC, 888, or Caesars. However, demand for those stocks has inflated their prices. In taking DraftKings public, the Diamond Eagle investors have secured a favorable position before enthusiastic stock traders bid the price up.

SBTech may be the biggest winner of all, however.

For all of its success in Europe, the company wasn’t having much success penetrating the US market. BetAmerica is the second-smallest online sportsbook in New Jersey behind Tropicana. Its prospects in Pennsylvania aren’t much better, especially as it was a bit slow getting its product to market there.

Conversely, DraftKings has the second-largest online sportsbook in New Jersey. Its 2019 revenue was over 50 times greater than BetAmerica’s. Assuming SBTech does eventually replace Kambi as DraftKings’ platform provider, that’s a huge coup.

Bigger is better in US sports betting

The online gambling landscape in the US is going to change dramatically this year. That’s partly a result of this and similar mergers and acquisitions which were announced in 2019.

This deal between DraftKings, SBTech and Diamond Eagle should be finalized in the next six months.

Around the same time this summer, The Stars Group will merge with Flutter Entertainment, which owns FanDuel. Eldorado Resorts will buy Caesars, and 888 Holdings has already acquired the sportsbook BetBright.

Will the trend continue? Only time will tell.

British bookmaker William Hill is another large European company with eyes on dominating the US market. It, too, could be looking for an acquisition to help bolster its emerging empire.

The question at this point, though, is who’s left to buy?

- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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