Need for Cash Driving DraftKings SPAC Talks

JohnWallStreet

Bloomberg reported back on October 30th that Diamond Eagle Acquisition Corp. - a special purpose acquisition company (SPAC) - was in “advanced talks” to acquire DraftKings. The two companies are said to be operating in an exclusive negotiating window. Chief business officer Ezra Kucharz has since acknowledged that DraftKings is exploring various avenues to go public (see: traditional IPO, direct listing & SPAC). Should the transaction fall through (which remains very much a possibility), the company is said to be willing to consider taking on another round of private financing (DraftKings has raised $644 million over 8 rounds to date); back in early October, Business Insider wrote that the company was looking to raise capital at a $2 billion valuation.

Howie Long-Short: For informational purposes, a SPAC is an investment fund that raises blind pool capital for the sole purpose of acquiring (or merging with) an existing business that is TBD at the time of the IPO. Diamond Eagle introduced a $400 million public offering in May. The company trades on the NASDAQ exchange under the symbol DEACU.

This isn’t the first time that Diamond Eagle has looked to enter the sports gaming space by targeting a prominent DFS player. You may recall the company proposed a ‘reverse merger’ to FanDuel back in 2018. Of course, both DraftKings and FanDuel are worth significantly more now that PASPA has been repealed than they were when DEACU was sniffing around the Flutter Entertainment subsidiary.

DraftKings is the “last standalone daily fantasy turned sports betting operator”, so no one will be surprised if/when they’re ultimately acquired. Without having seen the company's financials, it’s hard to determine if the decision to sell at the current time would be a wise one. Sara Slane (founder of Slane Advisory) says the company has “the brand, the database and the tech stack to do well in the future, but the [long-term success of the company will be determined by] their burn rate because [the process of getting a mobile product up and running in states across the country] is expensive and going to take a long time”; perhaps another half decade.

For Chris Grove (partner, Eilers & Krejcik Gaming), the right choice is less about the company’s ability to wait out the maturation of the U.S. sports gaming market and more about their immediate need for marketing (and programming) resources. “For DraftKings, and really for any sportsbook operator looking to gain and hold market share, there's a pressing need for money to plow into marketing and product. Low to no money almost guarantees low to no market share. So, whatever gets DraftKings to the cash position that keeps them competitive in the most efficient way possible is the most logical move for the company.” Considering that the capital coming into the market (see: rumors surrounding Bet365, Flutter Entertainment) will only drive up the price of marketing assets moving forward, it's hard to argue the point. 

SPACs can be used as a vehicle for private companies to go public without an IPO - which seems logical enough in the current market (see: Endeavor, WeWork) - but Grove doesn’t believe the pushback seen from the retail investor is driving the DraftKings talk; as Kucharz alluded to, they're simply “looking for the optimal path to cash.” 

It should be mentioned that opening oneself up to the public would be beneficial to DraftKings from a licensing (see: easier) and regulatory standpoint.

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