Bet On It: Penn acquires New York mobile sports wagering licenses from Wynn

Welcome to the latest edition of “Bet On It,” where The Fly looks at news and activity in the sports betting and iGaming space. 

SECTOR NEWS: DraftKings (DKNG) announced that it reached an agreement to acquire Jackpocket, the lottery app in the United States, for total consideration of approximately $750M, with approximately 55% of the consideration payable in cash funded from the company’s balance sheet with no capital raise required and approximately 45% of the consideration payable in the company’s Class A common stock, subject to customary purchase price adjustments. Conservatively assuming no additional OSB and iGaming legalization in the U.S., DraftKings expects the proposed transaction to drive $260M to $340M of incremental revenue and $60M to $100M of incremental adjusted EBITDA in fiscal year 2026. On the same basis, assuming no additional OSB and iGaming legalization in the U.S., DraftKings expects the proposed transaction to drive $350M to $450M of incremental revenue and $100M to $150M of incremental adjusted EBITDA in fiscal year 2028. Under the terms of the merger agreement entered into on February 11, Jackpocket stockholders will receive total consideration of approximately $750M on a fully diluted basis, consisting of approximately $412.5M in cash, subject to certain customary purchase price adjustments, and approximately $337.5M in the company’s Class A common stock, subject to the collar mechanism described below. The stock consideration will be subject to a collar pursuant to which a variable number of shares of DraftKings’ Class A common stock will be issued to Jackpocket stockholders in order to deliver a value of approximately $337.5M, so long as the 30-trading-day volume weighted average price of DraftKings’ Class A common stock as of the second trading day immediately preceding the closing of the proposed transaction remains between $31.68 and $42.86. In the event that DraftKings’ closing stock price is above $42.86 or below $31.68, Jackpocket stockholders will receive a fixed number of approximately 7,874,806 shares or approximately 10,654,149 shares, respectively, of DraftKings’ Class A common stock, representing approximately 2% of the outstanding shares of DraftKings’ Class A common stock. The merger agreement and the proposed transaction have been approved by the boards of each of DraftKings and Jackpocket, as well as Jackpocket’s stockholders.

Gan Limited (GAN) announced that Seamus McGill has recently been named the company’s CEO. McGill had previously been serving in an interim capacity. McGill’s will remain on the company’s board of directors and will be focused on guiding the company towards a timely closing with Sega Sammy Creation, Inc.

Separately, Gan announced that, at a special general meeting of its shareholders held on February 13, its shareholders overwhelmingly approved the previously announced merger agreement and merger of Gan and a subsidiary of Sega Sammy Creation, an affiliate of Sega Sammy Holdings (SGAMY). Over 95% of the votes cast voted in favor of the approval of the merger agreement and the merger. The closing of the merger is expected to occur in late 2024 or early 2025, subject to the satisfaction or waiver of certain conditions to closing, including the approval of the merger and change in control of Gan by certain gaming authorities. If the merger is completed, each Gan ordinary share issued immediately prior to the effective time of the merger will be automatically cancelled and converted into the right to receive $1.97 in cash with respect to each such ordinary share, without interest and less applicable withholding taxes.

Penn Entertainment (PENN) announced that it has reached an agreement with Wynn Interactive Holdings (WYNN) to acquire its New York mobile sports wagering licenses, providing Penn with market access to the jurisdiction. Pending regulatory approvals, Penn will launch its online sports wagering product, ESPN Bet, in New York in 2024. As part of the transaction, Penn is acquiring WSI US, LLC, from Wynn Interactive Holdings for $25M. WSI US, LLC is the entity that holds the mobile sports wagering licenses that were previously issued by the New York State Gaming Commission in 2021. Wynn Interactive is a subsidiary of Wynn Resorts, Limited. “This is an important development that will bring ESPN BET to the largest regulated online sports wagering market in North America,” said Jay Snowden, PENN Entertainment CEO and President. “Together with ESPN, we’re building a brand that is synonymous with sports betting, and operating in the New York market is key as we grow ESPN BET across the U.S.”

EARNINGS RECAP: DraftKings reported fourth quarter results last night and shares of the company were down 3% in after-hours trading.  Monthly unique payers increased to 3.5M and average revenue per monthly unique player was $116. While the company exceeded EPS expectations, DraftKings fell just shy of consensus estimates. However, DraftKings did raise both its FY24 revenue and EBITDA outlook. The company said, “DraftKings is raising its fiscal year 2024 revenue guidance to a range of $4.65 billion to $4.90 billion from the range of $4.50 billion to $4.80 billion, which the Company previously announced on November 2, 2023. The Company’s updated 2024 revenue guidance range equates to year-over-year growth of 27% to 34%. DraftKings is also increasing its fiscal year 2024 Adjusted EBITDA guidance. The Company now expects fiscal year 2024 Adjusted EBITDA of between $410 million and $510 million compared to its prior fiscal year 2024 Adjusted EBITDA guidance of between $350 million and $450 million, which the Company previously announced on November 2, 2023. The Company’s revenue and Adjusted EBITDA guidance for fiscal year 2024 includes all of its existing jurisdictions as well as mobile sports betting in Puerto Rico and North Carolina, which have authorized mobile sports betting and collectively represent approximately 4% of the U.S. population. DraftKings expects to launch its Sportsbook product in North Carolina on March 11, 2024 pending market access, licensure, regulatory approvals, and contractual approvals where applicable.” Benchmark raised the firm’s price target on DraftKings to $50 from $41 and kept a Buy rating on the shares. DraftKings’ Q4 financials demonstrated “exceptional resilience and strength,” especially after adjusting for unfavorable sports outcomes, the analyst tells investors. DraftKings has upwardly revised its FY24 guidance, “highlighting its robust growth prospects” and outstripping the consensus view, while the acquisition of Jackpocket “excites us for its potential to significantly boost customer value and acquisition efficiency,” the analyst added.

Penn Entertainment also reported Q4 earnings yesterday and share of the company plunged over 15%. In this quarter the company sold Barstool Sports and launched ESPN Bet after extending a sizable contract. Jay Snowden, CEO and president, said: “PENN delivered another quarter of solid property level performance while continuing to invest in our high growth digital business, which we believe will create significant long term shareholder value. Our retail results reflect strong customer demand and well-executed strategies across our portfolio. In our Interactive segment, ESPN BET attracted significantly more first-time depositors (FTDs) than we anticipated, which drove higher than expected promotional expense. Our successful launch led to substantial expansion in key performance indicators (KPIs) including monthly active users (MAUs), handle, and cash handle. Importantly, strong early retention and consistent user acquisition have led to steady month-over-month increases in cash handle as our promotional expense has started to normalize entering 2024. ESPN BET has also attracted the mass market sports fan, highlighting the potential to expand the appeal of sports betting and grow the overall market. This foundation sets the stage for continued growth and market share gains as we introduce further product enhancements and deeper integrations into the ESPN media ecosystem.” The company noted in its earnings release that ESPN Bet’s launch in North Carolina is expected in March and launch in new York is expected before the next football season. “The November 14th launch of ESPN BET led to tremendous download volumes, conversion to over 1 million FTDs, and record handle, supported by our partners at ESPN and our proprietary technology. Our comprehensive strategic alliance with ESPN is providing exceptional value, leading to attractive customer acquisition costs and marketing efficiencies. Additionally, our Hollywood-branded iCasino product within the ESPN BET app has started to benefit from cross-sell opportunities from ESPN BET, with solid revenue growth and record MAUs over the last several months. Looking ahead, we are excited to introduce ESPN BET in North Carolina (expected in March) and New York (expected prior to football season), in each case subject to regulatory approvals, which will take our addressable online sports betting U.S. population from 37% to 46% and significantly expand our reach and scale. Jefferies lowered the firm’s price target on Penn to $20 from $30 and reiterated a Hold rating on the shares after Penn reported Q4 revenue below the firm’s view and the Street’s estimate. The Interactive segment’s losses, driven by heavy investment in the recently launched platform ESPN Bet, negatively impacted overall company performance, overshadowing solid results from the core business, the analyst tells investors. The meaningful time span to digital profits in 2026 could overhang the shares in the interim, the analyst added.

MGM Resorts (MGM) shares fell, despite surpassing EPS and revenue expectations in the fourth quarter.  “Our Las Vegas Strip Resorts and MGM China set new all-time records for full year and fourth quarter Adjusted Property EBITDAR,” said Bill Hornbuckle, CEO and president of MGM Resorts. “Our premium positioning and offerings in Las Vegas enable us to capture incremental profit during major events such as the inaugural Formula 1 race and our first Super Bowl. 2024 is off to a winning start with the launch of our Marriott relationship as well as opportunities to increase our convention room nights and international mix.” Barclays decreased its price target on MGM Resorts to $55 from $57 and reaffirmed an Overweight rating on the shares following the “mixed” Q4 report. There are tough compares ahead for Las Vegas, but consensus estimates are already there, the analyst told investors in a research note. On the other hand, Citi raised its price target on MGM to $68 from $66.50 and backed a Buy rating on the shares. The firm said MGM management provided “some exciting comments” on the earnings call. Super Bowl LVIII drove volumes across the board and in Macau, the strong momentum continued into January with its market share topping 20%, the analyst tells investors in a research note.

KEEPING UP WITH THE JONESES: In January, FanDuel and DraftKings maintained their market share lead, while BetMGM climbed to third place from fifth in December, according to Jefferies. ESPN Bet, on the other hand, dropped to fifth place from third. FanDuel continued to dominate in Google search interest, web traffic visits, and webpage visit duration score, the firm said. However, ESPN Bet fell to fourth place in App Downloads, having been at the top in December, now trailing behind FanDuel, DraftKings, and BetMGM. DraftKings retained its second-place position in most categories but slipped to third place in web traffic visits, conceding its spot to bet365. January saw minimal shifts across categories, with BetMGM ascending to third place from sixth in search interest score, while ESPN Bet declined to sixth place from third. There was significant rearrangement among all brands, with private operators losing momentum, Jefferies told investors. FanDuel took the lead in momentum score in January, moving up from sixth place in December, while Bally dropped from first to fourth. DraftKings advanced to second place, and BetMGM jumped to third from seventh the previous month. BetRivers saw a decline in momentum score, falling to fifth position from second, while Caesars’ Sportsbook rose to seventh place from eleventh. WynnBet also improved its position, moving from eighth to sixth. Private operators bet365 and Tipico fell to eighth and ninth place, respectively, from fourth and fifth in December. ESPN Bet maintained its twelfth-place position with low momentum. The firm’s preferred names are Flutter Entertainment (FLUT), DraftKings, MGM and Rush Street Interactive (RSI). .

SUPER BOWL CLEAN UP: Macquarie projected a Super Bowl market hold of 4% following the Kansas City Chiefs’ victory over the San Francisco 49ers in Super Bowl LVIII. Although its estimated hold outcome is not as unfavorable as the worst-case scenario the firm outlined last week, it still falls short of an ideal result in terms of hold and expectations for Q1 revenue, according to Macquarie. Approximately 60% of public bettors favored the Chiefs for both spread and money line bets. In its analysis, the firm considered Vsin’s concluding betting trends along with the trends leading up to the game. The final over/under stood at 47, resulting in a push, while in early betting, the total odds went under 47.5, benefiting sportsbooks. 

SWEET HOME ALABAMA: On Wednesday, a proposal to introduce a lottery, casinos, and legalize sports betting in Alabama made progress in the Alabama House of Representatives, Mike Cason of Alabama.com reported. The House Economic Development and Tourism Committee endorsed the two-bill package through voice votes. However, Rep. Allen Treadaway, R-Morris, was the sole dissenting vote on both bills. Treadaway expressed multiple concerns about the bills and indicated his intention to discuss potential modifications with the sponsor. The committee’s approval paves the way for the legislation to be reviewed in the House of Representatives, possibly as early as Thursday. HB151, one of the bills, is a constitutional amendment that would necessitate voter approval if it successfully passes through the Legislature. It is slated to appear on the ballot in November. Alabama voters haven’t had an opportunity to vote on a lottery since 1999 when they rejected a proposal by Governor Don Siegelman. The second bill, HB152, is an extensive 144-page enabling bill outlining specific details on the operations of the proposed lottery, casinos, and sports betting.

ADDITIONAL ANALYST COMMENTARY: Susquehanna downgraded Boyd Gaming (BYD) to Neutral from Positive with a price target of $75, down from $84, as the firm expects revenue headwinds in 2024 in its “most valuable segment” of Las Vegas Locals without a notable offset in its other segments. While the firm expects Boyd’s cost control to remain “exceptional,” it thinks there’s a ceiling on the stock if its primary value drivers are maximizing yield and capital returns, the analyst tells investors.

Macquarie lowered the firm’s price target on Penn to $33 from $35 and keeps an Outperform rating on the shares after the company reported a Q4 EBITDAR miss on larger-than-expected Interactive losses. Penn’s Interactive losses are similar to DraftKings’ largest quarterly loss during its customer acquisition push, and better than Caesars’ (CZR) loss, but those companies are expected to produce positive EBITDA this year, which highlights “the degree to which PENN is playing catchup,” the analyst contended

BMO Capital hiked the firm’s price target on DraftKings to $51 from $43 and reiterated an Outperform rating on the shares. The company’s acquisition of the #1 lottery app Jackpocket extends its leadership position into the $100B U.S. lottery segment, the analyst tells investors in a research note. BMO added that it is positive on the deal and envisions “significant cross-sell opportunities”.

Craig-Hallum analyst Ryan Sigdahl maintained a Hold rating on Penn with a $30 price target after the company announced an agreement with Wynn to acquire its online sports betting license in New York for $25M. Given that Wynn’s online sports betting strategy hasn’t materialized as hoped, it is shutting down the business and monetizing assets where possible, the analyst tells investors in a research note. The firm thinks $25M is a fair price for both sides given the limited number of licenses in the state. It also notes that the fair value has decreased recently as many operators struggle. Hallum says New York presents a large total addressable market, adding critical scale for Penn’s national marketing and synergies with players traveling between neighboring states.

PUBLICLY TRADED COMPANIES IN THE SPACE INCLUDE: Accel Entertainment (ACEL), Bally’s (BALY), Boyd Gaming (BYD), Caesars (CZR), Churchill Downs (CHDN), DraftKings (DKNG), Flutter Entertainment (FLUT), Gambling.com (GAMB), Gan Limited (GAN), Genius Sports (GENI), Las Vegas Sands (LVS), MGM Resorts (MGM), Penn Entertainment (PENN), Rush Street Interactive (RSI), Super Group (SGHC) and Wynn Resorts (WYNN).