PointsBet has entered into a binding agreement with Fanatics Betting and Gaming (FBG) for the sale of its US business.

The likelihood of a sale was reported last week (11 May) by iGaming NEXT as rumours persisted around advanced acquisition talks between the two businesses.

Terms of the acquisition

PointsBet shareholders will now be invited to vote on the proposed transaction, which will take place on a debt free, cash free basis for a headline cash consideration of $150m, at a shareholder meeting in late June.

FBG will pay $100m to PointsBet upon initial completion of the deal, with a further $50m to be paid at subsequent completion.

In addition to the acquisition, PointsBet will provide services to FBG prior to the final closing of the deal, and will be reimbursed by FBG for those services.

Net proceeds of the sale, together with the majority of PointsBet’s corporate cash reserves, are expected to be distributed among shareholders. The firm’s board estimates the deal to deliver between A$1.07 and A$1.10 per share to shareholders.

Following the transaction, PointsBet will retain its Australian and Canadian businesses, as well as ownership of its proprietary sports betting, racing and iGaming platform and a perpetual, royalty-free licence to exploit its previously acquired Banach Technology assets, which will be sold to FBG under the deal.

A previously agreed deal between PointsBet and NBCUniversal, which saw the operator obliged to spend around $58m per year on advertising with the broadcaster, will be transferred in full to FBG as part of the transaction.

PointsBet’s final payment to NBCUniversal is included within a funding requirement capped at $21m between approval of the sale by shareholders and the final completion of the transaction.

Rationale behind the deal

PointsBet said it intended to alleviate the demands on its balance sheet by offloading its US business.

Having already considered and implemented a number of initiatives aimed at reducing the cash requirements of its US operations, the company’s corporate cash balance is still insufficient to fund the US business through to profitability, it said.

As a result, without putting the assets up for sale, PointsBet would have needed to raise additional capital in the near term, during a period of “challenging” market conditions.

Acies Investments’ Chris Grove offers his analysis of the acquisition

Any equity capital raised by the company would therefore need to be raised at a substantial discount to recent market prices, the firm said, while there could be no guarantee that additional capital could be raised at all in the near term.

The proposed transaction therefore addresses a key uncertainty for PointsBet by removing the need to raise capital in order to fund the US business to the point of becoming cash flow positive.

After completing the sale, PointsBet said it expects its remaining Australian and Canadian business to be at or around EBITDA breakeven on a standalone basis.

Management commentary

“In view of the US market in which the company has significant operations, the board has explored and considered a wide range of strategic alternatives over an extended period of time,” said PointsBet chairman Brett Paton. 

“Having considered all of the options potentially available to the company, the board believes the Fanatics Betting and Gaming proposal optimises value for shareholders.

“The acquisition by Fanatics Betting and Gaming of our US business will enable PointsBet to return significant capital to shareholders, while retaining strong Australian and Canadian businesses supported by our leading proprietary technology in a capital-light setting,” Paton concluded.

PointsBet CEO Sam Swannell added that in the US, “the costs of operating in a state-by-state environment, together with the requirement to build significant scale to compete against well capitalised operators, led us to explore a number of options.

“Fanatics Betting and Gaming has recognised our strategy, technology and team, as a platform for their own expansion in the online sports betting and iGaming market.

“Given Fanatics’ significant presence in the US sports market, we consider them to be a natural acquirer of our US business.”

Swannell concluded that the proposed transaction removes the risks and capital requirements associated with executing PointsBet’s US strategy.

The deal was poorly received by PointsBet shareholders. The announcement triggered a more than 20% decline in the ASX-listed operator’s share price.

PointsBet has reportedly changed strategy and is now exploring the possibility of selling its US operations after failing to secure a buyer for its Australian arm.

According to the Australian Financial Review (AFR), the company recently hired New York-based investment bank Moelis & Co to help facilitate the sale of its North American business.

The company’s shares surged by 7.6% on Friday (14 April) following the initial report.

PointsBet’s desire to offload a part of its business is not news.

In December, the company announced it was in talks with News Corp-backed Betr regarding the sale of its Australian trading business.

However, the talks have stalled, reportedly due to PointsBet CEO Sam Swanell’s reluctance to reduce the price tag of approximately A$250m for the division.

US business

PointsBet’s US business is currently unprofitable and is yet to make a dent in strong competition from FanDuel, DraftKings and BetMGM, which collectively hold nearly 85% of the market.

By selling its domestic Australian business, those funds could have been reinvested to support PointsBet’s growth in the US market.

This, in turn, could have improved the operator’s profitability prospects.

Entain has also been rumoured to be a bidder for PointsBet’s Australian arm, but no official announcement has been made and progress appears to have stalled.

PointsBet’s share price has witnessed a significant decline recently, with a 19% drop over the first three months of 2023 and an almost 59% fall in the past 12 months.

For H1 2023 (six months ending December 2023), the company reported a net win of A$105.3m in Australia, as well as A$70.1m in the US, and A$6.7m in Canada.

The company has been granted market access in 14 US states, plus Ontario in Canada.

As of April, PointsBet is live in Indiana, Colorado, Illinois, Kansas, Iowa, Louisiana, Michigan, Ohio, Maryland, New Jersey, Pennsylvania, Virginia, New York, and West Virginia.

However, the company withdrew its licence application in Massachusetts just weeks before the state’s mobile sports betting launch.

Potential buyers

It is unclear who has shown interest in the US division, although PointsBet’s proprietary trading technology is understood to be viewed as an attractive asset.

According to the AFR, one private equity group has shown interest, but early indications suggest PointsBet is not convinced by the deal due to pricing and structure.

While Bally’s Corporation expressed an interest in acquiring PointsBet’s US assets last year, it remains unclear whether the company is still interested in acquiring PointsBet US under new chief executive Robeson Reeves.

Another potential buyer could be Penn Entertainment, which already operates the Barstool Sportsbook in the US. A deal for PointsBet could potentially increase market share for the brand.

Penn Entertainment already owns a 6% stake in the Australian operator.

London-based investment bank Peel Hunt expects Flutter Entertainment, Entain and 888 to be positively transformed over the course of the next few years.

Today (2 September), Peel Hunt gaming analyst Ivor Jones explained in a note to investors why in his opinion, all three companies are undervalued.

“888, Entain and Flutter are all cash-generative businesses, but near-term cash flow is being held back by investment,” Jones said.

Transformation is ahead, however, believes the London-based investment bank. In the case of Flutter and Entain, this will come from the swing into profitability of their US businesses during 2023. In the case of 888, it should come from paying down the William Hill debt burden.

The investment bank pointed out the valuations of Entain and Flutter’s US offshoots are pivotal to their share prices.

Jones believes investors will give more credence to long-term potential once these companies become profitable, and that investors will pay more for growth after that point, although that requires patience.

Even though 888 has more modest plans in the US via its Sports Illustrated sportsbook, success for 888 in that market would also prove positive for its valuation too, Jones wrote.

In its analysis, the investment bank compared the operators’ EV/EBITDA multiples on two bases: first, based on forecast EBITDA; and next by excluding the contribution of the US businesses from the EBITDA but including their value as if they were standalone assets, based on Peel Hunt’s proprietary 2025 estimates.

As a result of these workings, Flutter’s EV/EBITDA multiple falls from 13.9x in FY23E to 8.3x in FY26E. However, assigning a £16bn asset value to Flutter’s US business (FanDuel) sees the implied multiple on the ex-US business fall from 3.7x to 2.0x.

Jones highlighted that Flutter has increased its debt through the recent acquisition of Sisal, and forecast that Flutter will not fall within its 1-2x target net debt/EBITDA range until 2024.

“From that point, while still investing in growth, we forecast that Flutter could pay a yield rising from 3.3% in FY24E up to 11% in FY26E,” said Jones.

In light of its analysis, the investment bank increased its target price for Flutter from 14,500p to 16,000p.

Switching to Entain, which is live in the US via BetMGM, Jones said the operator’s EV/EBITDA multiple falls from 9.1x in FY23E to 5.3x in FY26E. “However, assigning a £6.5bn value to Entain’s US business sees the implied multiple on the ex-US business fall from 2.7x to 1.2x. At our target price, those adjusted multiples would fall from 7.0x to 5.0x,” he said.

Entain is to increase its debt through the planned acquisition of SuperSport, and the investment bank forecast that it will not fall within its 1-2x target net debt/EBITDA range until 2024. From then on, Peel Hunt forecasts that Entain could pay a yield rising from 2.7% in FY24E up to 12% in FY26E.

888 is the most undervalued of the three companies, according to the bank’s analysis.

With the US (SI Sportsbook) a much smaller part of 888’s business, the two different valuation approaches result in multiples much closer to each other: “5.4x FY23E EBITDA including the US losses in EBITDA, and 4.4x attributing a value of £300m to what is more an option than a business in the US at present.

“888 has taken on a very material level of debt through the William Hill acquisition, and we forecast that it will not fall within its 2-3x target net debt/EBITDA range until 2026E,” Jones said.

At that point though, 888 could pay a yield of 38.1%, according to Jones, who acknowledges this “is a long time to wait in uncertain markets”.