Consolidation Likely as Operators Begin Pumping Brakes on Online Sports Betting

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Consolidation Likely as Operators Begin Pumping Brakes on Online Sports Betting
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The storm clouds have been collecting over the online sports betting business for a while. And now, the thunder is beginning to rumble, more loudly, it seems, by the day.

From the very beginning, the quarterly earnings reports of publicly traded companies showed startling numbers but told different stories depending on which set of figures one wanted to focus on. What was more important? The ever-increasing handle and revenue dollar figures that were the result of impressive customer growth, or the relentless flow of red ink from net losses in the hundreds of millions?

Then, at the gaming industry’s marquee conference in Las Vegas in October, the word “unsustainable” was on the lips of gaming executives regarding online sports betting’s marketing behaviors, which involved essentially giving away free money to capture and retain market share.

Eventually, there has been a trickle down to the stock market’s psyche where investors, both large and small — who had ignored the profit-and-loss numbers — began to pull back and stock prices stalled, then retreated.

Now, in the last week, major players in the gaming world are pumping the brakes on their involvement in online sports betting even as New York sports betting, the largest market to open so far, has been reporting massive handle since it launched in early January.

“There’s been a 50% to 80% correction on the (stock) price of the online gaming companies. In my opinion, it was long overdue. It will also probably lead to some business combinations,” said Jason Ader, CEO of SpringOwl Asset Management, who was a longtime financial analyst examining the gaming industry. Ader moved from analyst to being active in the industry, having served on the board of Las Vegas Sands and having involvement with IGT, Bwin, Stars Group, and, most recently, Playtech.

“It may be that the online gaming business in the U.S. will be dominated by just a handful of companies,” Ader said. “I would put FanDuel Sportsbook at the top of the list, meaning Flutter Entertainment, followed by DraftKings. Despite the stock price decline, they’re going to be a player in the U.S.”

Then Ader added of DraftKings Sportsbook: “They need to stop losing money. They lose money every-single-day. That’s why the stock price is where it’s at.“

DraftKings, a daily fantasy sports start-up that dramatically shifted gears to sports wagering and other ventures, started life as a publicly-traded company in April 2020 with a stock price around $20. As retail investor enthusiasm surged over the hype surrounding online sports gambling, DraftKings stock rose to the low 70s by March 2021. On Friday, it closed at just over $20.

To be fair, DraftKings isn’t alone on the online sports betting roller-coaster.

Other Sports Betting Stocks Suffer

Penn National, the publicly traded partner of Barstool Sports that also has bricks-and-mortar casinos, spiked to over 100 in January. On Friday, it was in the 40s.

Stock market tumult isn’t limited to gambling operators largely seen as tethered to online sports betting, either. Sportradar, largely a B2B company that provides data and content to sports gaming companies and others, has seen its stock price drop from 27 in January to under 13 on Friday.

In short, the public market sentiment has retrenched on online sports gaming and also caught up in the turmoil are companies with mixed assets. One of those is Bally’s Corp., which has bricks-and-mortar casinos, a business badly hurt by the COVID-19 pandemic, plus an online wagering component, BallyBet.

’Being Way Too Promotional’

BallyBet was awarded one of the nine coveted New York state online sports betting licenses, but the company has announced it won’t flip the switch in New York until at least April, electing to bypass Super Bowl betting and March Madness in making that decision.

Bally’s board chairman Soo Kim — who is in the interesting position of making a bid for controlling ownership of Bally’s through an offer by his private equity fund Standard General — bemoans the fierce and what he calls “insane” competition in the online sports betting world.

“I’m concerned that all the operators are spending way too much money, they’re being way too promotional,” Kim said in an interview with CNBC. “That’s going to create a bloodbath of earnings.” Then, consolidation will follow in time, he said, and “some of the weaker hands get taken out.”

Kim said that as the opening of the New York online sports wagering market approached — and there was already an obvious profit headwind of a 51% tax rate — there was a hope that “maybe people will be a little more reasonable about advertising and promotions because of the fact that there are fewer (operators).”

That didn’t happen as promotions have been extraordinarily generous, an obvious boon to New York bettors. As Kim pointed out, a bettor in New York doesn’t need to be a genius sports gambler to make money wagering in New York.

“Without casting aspersions on all of our fellow colleagues in the industry but you could literally open an account with one person and open an account with another person, get your free promotional money and bet separate, different ways on the same game, and you will win on one of them. I don’t know why everyone’s not doing that,” Kim said.

Wynn Looking to Sell?

Late last week, the story broke that Wynn Resorts was exploring bailing from the online gambling business. Reportedly, its digital assets are for sale — and at a deep discount. Last spring, Wynn Interactive announced it was coupled in a SPAC that would have created a combined company valued at more than $3 billion. But re-evaluating the market, Wynn Resorts walked away from the deal and now, reportedly, Wynn is looking to get rid of its digital assets, including WynnBET, for about $500 million.

That was not entirely a shock after Wynn executives had said in an earnings call in November that they were not at all eager to get into what had become a money-burning business of luring and retaining online sports bettors.

Then, last week, Las Vegas Sands executives echoed that sentiment saying during an earnings call that their focus will be on their bricks-and-mortar casinos in Singapore and Macau, and not on online sports gambling in the U.S.

’A Lot of Blood Spilled’

“We’ve all followed what’s happened with digital equities and the struggle there,” Las Vegas Sands CEO Rob Goldstein said. “I believe there will be a day when sports betting and iGaming are very successful businesses and we’ll continue to look at the opportunities and wait patiently. It hasn’t been a bad idea to wait the last six to eight months to see how this shakes out. There’s been a lot of blood spilled. We’ll continue to evaluate to see if there’s an entry point for LVS.”

DraftKings has consistently said that it expects to be profitable in a given state two to three years after entering that state’s legal sports betting market. The only state that qualifies on that timeline is New Jersey, where DraftKings says it is profitable. However, now that New York has opened to online sports betting, and New Jersey was estimated to attract 20% of its handle from New Yorkers, the impact from New York on New Jersey (and betting operators) remains uncertain.

If the reports concerning Wynn shedding its digital assets turn out to be true, a closely watched subplot will be who winds up with the New York online sports betting license Wynn currently holds and whether there will be any speedbumps in transferring the license.

“Without knowing who the buyer is, it’s hard to handicap,” said Ader of SpringOwl Asset Management. A well-recognized gaming company would involve an easier transfer with normal regulatory checks. “If it’s an entrepreneur, it may be a little more complicated,” Ader said. “I think we have to stay tuned on that.”

Louisiana Launches Online Sports Betting

In the meantime, Louisiana online sports betting just started with enthusiastic betting activity and sometime this year, Maryland is expected to start the application process for online applicants. Louisiana and Maryland have both had retail sports betting operating before online.

What is certain about online sports wagering in America is that it is evolving at a furious pace. Kansas is another state that's looking to move forward with sports betting. While it's a small state, Kansas online sportsbooks will allow locals to enjoy sports betting. However, it will take months before anything happens in Sunflower State.

Kim believes, as Ader does, that consolidation is inevitable. Quite likely, the news in the online gaming sector over the next year or so will be about mergers and acquisitions.

To be sure, Kim is a believer in gaming, both online and bricks-and-mortar, and that’s the reason his private equity company, Standard General, is making an offer for the gaming company on whose board he sits. (Note: Kim has essentially recused himself from the Bally’s decision-making process on the Standard General offer). But his optimism in gaming is longer term.

“The current version of sports betting is not a great business,” Kim said. “It’s a fine business (but) it not a great business. We think there will be a wave of consolidation that will rationalize promotions. But more importantly, people will stop competing with just free money … (and) start competing with product.”

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