Striking gold: Why DraftKings buying GNOG is a 24-carat deal
Acquiring an igaming-centric brand with little customer overlap to DraftKings’ audience could be the smartest play so far
More than six months ago, the rumour mill suggested DraftKings could be on the prowl for a casino-centric brand to strengthen the sports betting and DFS heavyweight’s hand in igaming.
That speculation mounted in March when the Boston-based operator sought to raise another $1bn in funding.
Golden Nugget Online Gaming (GNOG), which was spun off from Golden Nugget and floated via a SPAC at the end of 2020, was touted as a credible target by the likes of Eilers & Krejcik Gaming (EKG).
This turned out to be an astute prediction as DraftKings snapped up GNOG on 9 August in an all-stock deal that values the online casino operator at an estimated $1.56bn – a 7.6x 2022E revenue multiple.
While the purchase is expected to deliver more than $300m of synergies at maturity, partly through migrating GNOG to DraftKings’ in-house platform, it boils down to acquiring a well-known gaming brand and going after non-sports fans and casino (read slots) players.
DraftKings’ customers are overwhelmingly male, yet almost 50% of GNOG’s customer base is female and its players are typically older than DraftKings users.
So, as DraftKings CEO and co-founder Jason Robins pointed out on the investor call, there is “not a great deal of overlap in where the brands appeal” and that both have “distinct audiences and distinct demographics”.
“As much as we really established ourselves as a sports brand, [we] haven’t necessarily broken through into the casino customer that isn’t into sports,” he remarked.
Robins added: “[With GNOG] we think that there’s a tremendous opportunity to broaden the demographics of who we reach and to deepen our market share on the igaming side.”
It is three-and-half years since DraftKings threw its hat into the online casino ring by launching a single blackjack game in New Jersey.
Yet the company has since managed to secure a top-three position in igaming nationally, an achievement Robins has described as “remarkable”.
This has largely been achieved through cross-sell, with the firm revealing earlier this year that 57% of online sportsbook users in New Jersey, Pennsylvania and West Virginia placed a bet with DraftKings’ igaming offering in 2020.
Acquiring a casino-first operator in GNOG, which boasts a database of 5.5 million players across retail and online, allows the company to increase market share over time and, as EKG sees it, try to block the rise of brick-and-mortar rival brands.
We like DK-GNOG for a number of reasons—esp. as a defensive hedge against the ascendancy of BetMGM in online casino, and the looming such ascendancy of Caesars, Penn, and even FanDuel-Stardust—all of which are only scratching surface of casino customer database potential. pic.twitter.com/BNVvwrpTx8
— Chris Krafcik (@ckrafcik) August 9, 2021
Making a play
Last year, GNOG achieved $91.1m in net revenue – up from $55.4m in 2019 and a 49% rise in CAGR from 2016 to 2020 – resulting in $28.9m in adjusted EBITDA.
The brand also does very well with player acquisition and retention; GNOG had record customer acquisition in 2020, with new active depositors up 67% and returning active depositors up 29%.
Furthermore, a key asset that DraftKings is getting its hands on is the live dealer studio at Golden Nugget’s Atlantic City property.
The facility opened in 2016, making Golden Nugget the first with live casino in New Jersey, and helped propel the Golden Nugget licence to the clear number one spot in the state’s monthly revenue rankings (recently surpassed by Borgata).
The studio is currently being expanded by 1,800 sq ft, increasing the table count from 18 to 33, and is due to be completed in Q3.
On the live casino studio, Robins said: “We think there’s an opportunity to bring that over to DraftKings and to replace and enhance some of the existing live dealing automotive dealer offerings that we have.”
Meanwhile, the transaction comes with a commercial arrangement with Fertitta Entertainment (billionaire Tilman Fertitta owns 45% of GNOG and also the NBA’s Houston Rockets).
This includes DraftKings becoming the exclusive DFS, sports betting and igaming partner of the Rockets, one of the US’ most supported sports franchises.
The agreement will see the operator open a sportsbook at the Rockets’ Toyota Center should Texas legalise sports betting. In addition, DraftKings will expand its retail sportsbooks at Golden Nugget properties, helping to drive omni-channel efforts.
Lead from the front
One perhaps overlooked point to this deal is that GNOG has arguably the best management team in regulated US online gambling in the form of president Thomas Winter and VP of product and operations Warren Steven.
Winter arrived from Europe in 2013 to oversee Golden Nugget’s online gaming launch in New Jersey (it missed the synchronised start due to technical problems), but few onlookers predicted one of the smallest properties in Atlantic City as a potential market leader.
The fact GNOG has been sold to DraftKings eight years later in a deal worth $1.56bn speaks volumes to what Winter has achieved with the brand.
In fact, one industry analyst described what the Frenchman has managed to accomplish with GNOG as the greatest success story of the first decade of US online gambling.
Finally, DraftKings is doubling down on the igaming opportunity because it is more lucrative than other verticals. Indeed, it’s a reliable money-making machine compared with a low-margin and unpredictable product like sports betting.
GNOG is live in Michigan and West Virginia besides New Jersey (not yet Pennsylvania), however Robins mentioned how he expects more states to give igaming the green light in the future.
If states that have legalised and regulated sports betting realise the tax dollars they are missing out on by not having online casino, DraftKings could have put itself in a real position to strike gold for many years to come.