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Is DraftKings Worth the Gamble?

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Is DraftKings Worth the Gamble?

Written by: Stephen L Kanaval

Daily fantasy sports company and bookmaker, DraftKings, is finally going public via a merger announced this week with Diamond Eagle Acquisition Corp., a special purpose acquisition company (SPAC). Draftkings is concurrently merging with SBTech, an online betting and gaming technology firm. The deal includes a $304 million equity investment from several institutional investors that will close at the same time the merger is completed, according to the announcement.After the close of the deal, Diamond Eagle will change its name to DraftKings and get a new Nasdaq ticker symbol once the deal closes, the companies said. Diamond Eagle shares were up about 11 percent in premarket trading at $11.75.

The move will create the country’s only “pure-play” sports betting and online gaming company. All three companies received approval from their respective boards of directors, which will be completed in early 2020.

A long time coming

DraftKings has considered going public since May 2018 when the Supreme Court upheld the legality of sports betting at the state level. Prior to the desire to IPO, DraftKings and FanDuel discussed a merger, but it fell through following the FTC’s concern that their merger would have given the combined entity 90 percent of the daily fantasy sports market.

The merger was discussed to help the two companies battle financial woes. Axios published financial data from the two companies in 2017 and the numbers showed that both companies were burning through cash. For example, in 2016, DraftKings had revenues of $160 million and an operating loss of $92 million. In 2015, the company incurred an operating loss of $509 million. In the first three quarters of 2016, FanDuel posted $91 million in revenue and EBITDA of negative $59 million.

These losses seemingly stemmed from the battle for market share as the two spent hundred of millions of dollars in TV ads. After the aforementioned failed merger, FanDuel sold to Paddy Power for around what they had raised and DraftKing’s is now going public to try to carve increased market share even though state regulations have proven tough.

Tough sledding ahead

“I think if it were legalized throughout the U.S., estimates are in the tens of billions of dollars. So, you know, I think it could be quite a large industry, and we think that, you know, the online component will be the majority of it,” CEO Jason Robins told Yahoo Finance.

In recent news, DraftKings does have official access to the NBA’s betting data and league markers across its mobile platforms. In addition, eight states have come onboard for full mobile sports betting (Indiana, Nevada, New Jersey, Iowa, Pennsylvania, Rhode Island, West Virginia and New Hampshire on December 30th). Despite the Supreme Court’s decision, state regulators have been hesitant to embrace online gambling. The reason is that there are a lot of moving parts for states to monitor like player balances, KYC requirements, and geolocation, according to the Online Poker Report, which has been covering the story in detail.

“We had three objectives we were trying to solve for. First was, we wanted to complete the purchase of SB Tech, which required some cash. Second is that we wanted to raise additional capital to pursue state launches for all these new states that are legalizing online sports betting. And third, we wanted to get public. And this allowed us to do all three in the same transaction,” Robins told Yahoo. “So we looked at other options as well, but everything else would, you know, usually multiple transactions and lengthier timeline. This is a way to kind of get it all done at the same time and have a real efficient way of solving for all of our objectives.”

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