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Joined Oct 26, 2011
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GET READY FOR A DEEP $DKNG

BACKGROUND ON THE ILLUSTRIOUS IPO

In December, Draft Kings announced plans to become a publicly traded entity via a reverse merger with Diamond Eagle Acquisition Corp. (NASDAQ:DEAC) and SBTech. DraftKings was founded in 2011 as a fantasy sports company. Its earlier investors include the Raine Group, and the owners of the New England Patriots. The deal valued the sports betting firm at $3.3 billion. Under the terms of that transaction, Diamond Eagle a special purpose acquisition company (SPAC) or blank check entity took the Draft Kings name, changed the ticker and reincorporated in Nevada from Los Angeles. The combined company projects to have $540 million in revenue next year, with $400 million of that coming from DraftKings and $140 million from SBTech, per founder Jason Robins. Revenues are expected to grow to $700 million in 2021, with $550 million coming from DraftKings.

Diamond Eagle is the fifth SPAC set up by serial dealmaker Jeff Sagansky, who founded Diamond Eagle with investor Harry Sloan. Sloan served as chairman and CEO of MGM between 2005 and 2009 prior to the completion of its restructuring via a pre-packaged bankruptcy. He was also the founder, chairman and CEO of SBS Broadcasting, Europe’s second-largest broadcaster. Sloan founded SBS Broadcasting in 1990 with a personal investment of $5 million. He built SBS into the second largest broadcaster in Europe, with 16 television stations, 21 premium pay channels and 11 radio networks, reaching 100 million people in nine countries. He led the company’s initial public offering in 1993 and sold SBS (Nasdaq: SBTV) for $2.6 billion in October 2005 to Permira and KKR. In 2007, SBS consolidated its operations into Prosieben Sat.1 Media AG, Germany’s largest television broadcasting group, creating a European media powerhouse.

Incidentally, the two have their sixth SPAC on deck, Flying Eagle Acquisiton Co. SPACs raise money from public investors to pursue acquisitions, allowing a private company to go public without an initial public offering.

DISNEY “INVESTMENT”

In 2015, Fox invested $160 million in DraftKings. DFS was hot hot hot. Of course, much like weed being hot hot hot and Constellation writing down Canopy, Fox took a write-down to the tune of 60% on DKNG. A miniscule deep dicking, for the behemoth. Disney later picked up Fox in a $71 billion deal, leaving them with the scraps of the Draft Kings investment. Hence Disney owns 6% — not quite a deliberate stake.

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DUOPOLY

For you ham and eggers who are not well versed in googling. The DFS (Daily Fantasy Sports) “industry” if you can call it that, is currently a duopoly, or a situation in which two suppliers dominate the market for a commodity or service. The other player is known as FanDuel.

FanDuel was founded in 2009 and sold to Paddy Power Betfair in 2019. For whatever reason, Paddy Power changed its name to Flutter Entertainemnt in 2019 also, to better reflect the diversity of its brands. Per Flutter Annual report, FanDuel share of US online sports betting market stood at 44%. Together with DraftKings, the duopoly makes up ~95% of US Online Sports Betting. Unclear if that metric refers to stakes or actual revenues.

The FanDuel sportbook has a retail presence in 6 states and is live online in 4 (four multichannel in New Jersey, Indiana,West Virginia and Pennsylvania, and two retail-only in NewYork and Iowa). In addition to the sports-books, FD offers daily fantasy sports across 40 states, horse racing wagering via TVG business and online casino in both New Jersey and Pennsylvania.

All in all, Total Flutter Group Revenues for 2019 = £2.1 billion. Of that, roughly £376 million in revenues were from “US Operations” which are comprised of: FanDuel + a dainty horse racing operation + online casinos in NJ/Penn + a few retail boxes.

To put sports betting into context of Total Flutter Group Revenues, 42% or £900m of reveneues were a results of Sports Betting and of that sum, approximatley 57% or £513mil from online/mobile channels.

The question is what the hell is the actual market size of online sports betting at the moment. The answer is UNCLEAR. Morgan Stanley, with no reason to be modest, puts the number at $7 BILLION US in 2025, saying it could “swell” to $15 BILLION if all 50 states sign off by then.

GamblingCompliance, a company that tracks the activity across the U.S. and Europe, is forecasting that sports betting will generate between $2 billion and $6 billion per year in 2022.

Goal posts are wide. Abjectly laughable.

In any case, forecasters gonna forecast. So we take it wit a grain of himalayan pink salt. Elitist salt, per members of the hallowed halls.

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A NOTE ON FANDUEL SALE TO PADDY POWER/FLUTTER GROUP

In considering Draft Kings, one might also look at FanDuel’s history. In July of 2018, Paddy Power (now Flutter Group) picked up FanDuel for what some might consider a paltry sum, given the $416million it had raised in 7 rounds of funding at valuations reaching $1 billion plus.

For the figures, The Paddy Power Group contribued its existing US assets (aka Betfair Assets) along with $158m of cash. This cash contribution was to be used to pay down existing FanDuel debt (net debt of $76m at 31 March 2018) and fund working capital of the combined business. Betfair US had gross assets of $612m at 31 December 2017. So, at max, the total consideration was $770million.

As a sidenote, In 2017, the last full year of results prior to merger, FanDuel reported $124 million in revenue and 1.3 million active customers.

In court, FanDuels founder moaned about the $465 million “valuation” which was allegedly depressed to favor preferred investors. Probably because he got a big fat bagel out of the deal. Apparently, the deal was not adjusted to reflect the repeal of PAPSA, which is really the tailwind/hype behind the industry at the moment. That and of course “the return of sports” – yawn.

Interestingly, in another lawsuit, filed by employees who also received nothing — we see some details of Moelis’s prognostications on FanDuels prospects.

The lawsuit also notes that after the failed DraftKings merger, Moelis & Company offered this information to the board of directors (mostly KKR and Shamrock):

On information and belief, Moelis instead presented potential investors with an appendix to its presentation-prepared at least in part by FanDuel itself-that indicated that FanDuel would be substantially more valuable if the Supreme Court overturned the federal prohibition on state-sanctioned sports gambling.

That analysis assumed annualized revenue gains for FanDuel ranging from $20 to $35 million in year 1 (2018) to $490 to $815 million in year 5 (2022), assuming, FanDuel obtained a conservative 5% share of the U.S. sports betting market. When combined with the expected growth of the daily fantasy sports business, FanDuel was projected to earn more than $1.1 billion in revenue within five years at an average year-over-year revenue growth of greater than 50%.

So, per Moelis, we have a high estimate of a roughly $20 billion “sports betting market” on the high end, implied by $1.1 billion in 2022 revs and 5% share. Lord only knows if thats all sports betting or online sports betting. No matter, just get the deal done.

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QUANTIFYING DEGENERAGY

What better place to look for answers to this TAM question than Flutter Group’s Annual Report.

Global betting and gaming market incorporates a wide array of products and services including sports betting, lotteries, casino games, poker and bingo. These products are offered in both land-based venues (such as casinos, betting shops and race tracks) and across online/mobile/ telephone channels. The total market is estimated to be worth c. £345bn. Since the late 1990s, online channels have grown strongly (estimated CAGR* of 10% in the five years to 2019) with online now representing c. 12% of the total market.

UK is a relatively mature gambling market but remains highly competitive. It is fully regulated and is estimated to be worth approximately £14bn annually (including lottery). The UK online sports and gaming market is worth c. £5bn with the UK retail market worth c. £3bn. Flutter Group (owner of Paddypower) estimates — UK online market is growing at 4-5% per annum. The Irish online sports and gaming market is worth c. €350m, slightly larger than the Irish retail market which is worth an estimated €340m.

The Spanish online betting market was regulated in 2012 and is worth an estimated €700m.Italy is the largest fully-regulated continental European online betting market, worth an estimated €1.7bn. The Swedish online market regulated in 2018 and is worth an estimated £700m. The Australian sports betting market is fully regulated and is worth an estimated A$5bn, with online and mobile accounting for almost 69% of the total market.

En toto Europe with 700million people, does roughly 25 billion Euros in Gross Online Gaming Revenues. Of that 42% or so are Sports. 10 Billion Euros, maybe.

With regards to the US Market :

Traditionally the market has been predominantly land-based, with online sports betting (horse racing) and gaming only available on a very limited basis at state level. In May 2018 the US Supreme Court overturned the Professional and Amateur Sports Act (“PASPA”), which effectively imposed a federal ban on sports betting across 46 US states. The growth opportunity in the US has continued to unfold quickly during 2019. We have been encouraged by the pace of regulation to date, with 14 individual states having now passed sports betting legislation. These 14 states account for c. 24% of the US population and with more states expected to follow, we are now increasingly confident that the total US addressable market for our products could exceed $10bn.

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A NOTE ON UK’S HIGHEST PAID EXECUTIVE AT £323 MILLION QUID

Who might this be? One Denise Coates of Bet365. A wonderful pure-play online betting concern. Founded in 2000. Think about that, 20 odd years to get to £3billion in revenues.

What you want to note about Bet365 is that roughly 40% is sports betting, and of that 79% is “in-play” betting or live betting, per company filings. Piking on the next point in the match is the holy grail.

Bet365 is comin’ to town.

Although Bet365 isn’t the first mobile sportsbook to enter the market (Colorado), their presence will be felt once they’re operating.

FIRST TO MARKET IN NJ DON’T MEAN SHIT

A list of the entrants in New Jersey, along with their back end “partners”, for your perusal.

Neat that they built their own DFS product, but the rest is off-the-shelf. Nothing makes them special.

. . . we built our whole Daily fantasy product from scratch and have always had pretty much full control over all aspects of it. And we have had — in a very quick time period, we went from having absolutely nothing on sports betting to being first to launch in New Jersey. And the only way we were able to do that was a big chunk of the product, the back end, we’ve been utilizing a third-party called Kambi to provide the betting lines and all the risk management and all that behind it, the trading and everything behind it. — Jason Robins DraftKings, Inc. – Co-Founder & CEO at MS TMT 03/05/20

Draft Kings uses Kambi for their back end, formerly part of Swedish online gambling giant the Kindred Group that provides B2B sports betting services for several top-tier operators, including Kindred and 888. The latter, is of course another late 90s era online gaming outfit, delivers about $560mil in revs whilst trading at $700mil cap — ticker 888.L for those of you intrigued.

Here are all the venues for online sports betting by state.

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FINALLY FOR THE ASSHAT OF THE YEAR NOMINATION.

Jason Robins DraftKings, Inc. Co-Founder & CEO @ MORGAN STANLEY 030520 :

. . . Australia is certainly a rabid betting market. But I think the U.S. is too. The U.S. people don’t realize it’s #3 in the world in gambling losses per capita, and that’s in a market that is actually not really well regulated and doesn’t have a robust online market. Australia is #1. But I think the U.S. has the potential to, on a per capita basis, be every bit as big as those. — Jason Robins DraftKings, Inc. Co-Founder & CEO @ morgan stanley tmt 030520 —

h/t @bubba

FINAL THOUGHTS

Quit telling yourself stories about a grande ol’ sports coming back. This is a customer acquisition tool at best, not the 800 pound gorilla in online sports betting. The DFS crowd will surely get excited about betting on sports and cross-selling is the name of the game.

Look to Flutter’s comments on FanDuel for a big-pic clue :

During 2019, we successfully leveraged our key US assets to acquire 285,000 additional sports betting customers, bringing our total US sports-betting customer base to over 350,000.

42% of our sports betting customers have come from the Daily Fantasy Sports database to date and cross sell into the New Jersey casino has accelerated significantly since we embedded gaming content into our sports app.

The FanDuel brand which resonates strongly, benefitting from a marketing investment of $130m during 2019 alone and over $600m to date. Average customer acquisition cost has been less than $250 since the sportsbook was launched.

Recent Results :
2019 Revs = $323 mil
2019 Net Loss = $142 mil (2x yoy)
1Q20 Revs = $0
Company cash burn to $15 million to $20 million per month (during shutdown)
$405 million cash
684,000 monthly unique paid users (MPUs) in 2019, up nearly 14% from 2018

Stock probably a Mersenne Twister rather than a compounder. Beware the short, culturally clumsy European operators could be in for a quick deal for brand awareness. $10 billion+ an unlikely sticker price.

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