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May 18, 2023

PointsBet Acquisition to Accelerate Fanatics’ U.S. Sports Betting Push By At Least 18 Mo.

Fanatics recently bought PointsBet’s U.S. betting business for $150 million in cash.

The deal gives the nascent gaming operator several constituent parts expected to super-charge its sports betting plans in the U.S. market–perhaps by more than 18 months. The company believes it will now have a product ready to compete with the market leaders by the time football season rolls around.

The deal also allows PointsBet to exit a secondary market that had become too costly–and save tens of millions of dollars in the process. The way the deal is structured ensures the Australian gaming operator loses no more than another $21 million between now and closing. PointsBet was forecasted to lose between $52 million and $55.3 million in H2 ’23.

However, industry insiders say it is an underwhelming end to the Australian operator's U.S. excursion.

"Shareholder expectations peaked in early 2021 on the heels of the NBC deal as management maintained confidence in its plans of achieving 5% market share across target jurisdictions," Lloyd Danzig (managing partner, Sharp Alpha Advisors) said. "The proposed Fanatics acquisition coupled with the implied value of remaining assets reflects a company worth less than half its IPO price, a disappointing outcome for investors."

PointsBet’s share price (ASX: PBH) is down ~25% since the deal was first reported last Sunday evening.  

The acquisition looks to be a win for Fanatics. The company gains some of the technology, market access, and talent it will need to compete for a top five position in the U.S. market, and it managed to do it in a single transaction.

“Sure, Fanatics could have built these pieces or acquired them piecemeal,” Chris Grove (co-founding partner, Acies Investments) said. “But doing it in one fell swoop, at a price that feels reasonable, was a way to accelerate their development.”

For context, when rumors of a Fanatics-PointsBet deal first surfaced in July ’21, the expectation was the latter would command closer to $500 million than $100 million.

That’s not to say Fanatics got a screaming deal. The sale price is in line with the operating segment’s implied valuation.

“It's not as if the market valued PointsBet's U.S. business at hundreds of millions of dollars," Grove said. "If you looked at PointsBet’s market cap before the deal, backed out the cash on hand, and then backed out the value of the Australian business, shareholders were valuing it at something between what Fanatics is offering and quite a bit less.”

PointsBet will retain its Australian business (along with its growing Canadian business).

The Fanatics Sportsbook is getting a chance to integrate the best parts of PointsBet’s tech stack into its own platform.

The challenger operator is primarily focused on The Odds Factory, PointsBet's risk and trading software that will allow Fanatics to expand its betting markets and the offerings bettors can wager on. PointsBet acquired The Odds Factory as part of a $43 million acquisition of Banach Technology in March 2021.

Fanatics is currently operating in three states. It has a retail location at Fed-Ex Field in Maryland (the only sportsbook inside an NFL stadium), and existing Fanatics e-commerce customers in Tennessee and Ohio have access to the online sportbook’s extended beta period.

The company will pick up market access in a handful of new states in the deal.

However, “what really matters is New York, Michigan and Pennsylvania,” Grove said.

That is because the supply of skins necessary to operate in those states is constrained. It would have cost Fanatics tens of millions of dollars to get into NY, MI and PA on an ala carte basis, if it were even possible.

The Michigan skin is particularly valuable.

The state is “one of the more productive online sports betting and online casino markets in the U.S.," Grove said. "And we're not exactly minting new online casino states, so the value of those that already have online casino, especially the at-scale markets, is especially meaningful."

And while some have scoffed at the idea Fanatics is acquiring top-end talent, Grove sees value in the investments PointsBet has made to date in recruitment and training.

“The reality is it takes massive teams to run a competitive national brand in the U.S. market. The cost, effort, and risk associated with hiring those teams one at a time is substantial,” he said. “The ability to secure a team with operational expertise, especially in areas where Fanatics may be a little less experienced, has value.” 

Fanatics inherits PointsBet’s U.S. client base too.

That may not be as big of a deal for Fanatics as it would be for some operators. Remember, the presumption is the company’s existing client base (95 million strong) and asymmetrical approach (think: offering bettors rewards in the form of club merchandise and collectibles) will help it to take market share.

But the Australian operator still had upwards of 300,000 paid active customers in the U.S. market over the trailing 12 months.

That does not mean Fanatics will become a market leader overnight.

“Breaking into the top three is a big hill to climb for anyone,” Grove said.

Fanatics isn’t particularly worried about it though in the short-term. The company is taking a ten-year approach, and is confident focusing on its product and leveraging the Fanatics ecosystem will yield the desired results.

It is harder to suggest PointsBet came out a winner in the deal. As Danzig noted, the company’s value has steadily declined over the last two years.

That isn’t particularly unusual. Everyone in the market, save FanDuel and perhaps DraftKings, is disappointed with where they sit today versus expectations of just a few years ago.  

But $150 million “is a touch lower than many folks in the industry –and, apparently, shareholders– were expecting,” Grove said. “And I guarantee you that their management, investors and employees did not invest what they invested, in terms of energy, time, and money into the U.S. market, with this as the desired outcome. It's probably the best outcome at this stage, but it certainly wasn't the goal”

The purchase price makes for another tough comp (see: Fubo Gaming, MaximBet) for other sub-scale operators looking to exit.

"PointsBet was one of the more successful sub-scale US operators from a brand awareness and share of wallet perspective," Danzig said. "The $150 million exit valuation showcases the extent to which investor appetite has waned for B2C online sports betting brands outside of the market leaders."

That's may not necessarily be a bad thing. Grove thinks it is premature for most of them to throw in the towel, anyway.

“We are all being a bit too fatalistic about the inevitability of FanDuel, DraftKings and BetMGM maintaining the consolidated share that they currently have,” he said. “We are still very early in this journey from a product, brand and market perspective. First quarter, first half at worst.”  

By the time the second half starts, Fanatics hopes to have established itself as an effective second mover.