Mickey Mouse is now getting in on the action in the US sports betting market. Walt Disney Co’s (US:DIS) announcement last week that it is moving into the online gambling space has coincided with reports of strong American trading at sector operators, highlighting the centrality of the market to the future fortunes of gambling companies.
Disney-owned sports channel ESPN has signed a $2bn (£1.6bn) deal with Penn Entertainment (US:PENN) that will see a rebranded sportsbook run under the name ESPN Bet. Penn Entertainment, which estimates the tie-up will provide $500mn to $1bn of annual adjusted cash profits, will pay ESPN $1.5bn in cash over 10 years and give it $500mn-worth of warrants for its shares.
Penn has opted for ESPN after working alongside independent sports media company Barstool Sports since 2020. It bought out the company entirely earlier this year, but has handed it back to the founder for just $1 after licensing the ESPN name. This represents a serious shift from a popular but niche brand name to one of the best-known media entities in the US, and follows the strategy of media and betting tie-ups seen in the UK through SkyBet and others.
US betting growth
The US has not always been a lucrative destination for sports betting houses (at least those operating legally). It only replaced the UK as the biggest regulated online market after the Supreme Court ruled in 2018 that 1992's effective nationwide ban (certain activities were allowed only in four states up to that point) on sports betting was unconstitutional. Analysts at investment bank Jefferies think the market represents “a multi-year growth opportunity” for investors.
Growth has certainly been rapid since the Supreme Court ruling. According to estimates from the American Gaming Association, 50.4mn Americans bet on the outcome of the 2023 Super Bowl, a 61 per cent increase on the prior year.
The three leading players in the US sports betting market are FanDuel, BetMGM and DraftKings (US:DKNG). FanDuel is owned by Flutter Entertainment (FLTR), while BetMGM is a joint venture between Entain (ENT) and MGM Resorts International (US:MGM). Entain investors had been holding out hope for another bid for the company from MGM, but these were dashed back in February.
Analysts at broker Peel Hunt told Investors' Chronicle that “there is limited opportunity for success for any of the operators outside the leading triumvirate although it will be interesting to see if Fanatics [a digital sports platform] and ESPN/Penn are able to carve out more than a niche”.
Smaller operators in the US seem to be taking a state-by-state approach, in line with post-2018 legalisation efforts, rather than trying to tackle the market with a national brand. 888 (888) is doing this through its SI Sportsbook brand, as is private operator Bet365. Not all operators are growing, though. Wynn Resorts (US:Wynn) has announced it is pulling its betting and gaming platform out of eight states because of legislative uncertainty and high marketing costs.
While the market environment isn't straightforward, companies are battling it out for share as more states open up. DraftKings, for example, launched a video streaming service earlier this year in a bid to remain competitive with market leader Flutter. Competitiveness is also seen in acquisition activity, such as when Entain announced the £200mn purchase of US-based sports modelling and data analytics company Angstrom Sports in July. This is expected to complete in the second half, with the company hoping it will benefit it “particularly in the fast-growing markets of parlay [multi or accumulator bets] and in-play wagering” in the US.
Recent results have solidified the idea that the US is now the key gambling market, as operators start hitting profitability there. Flutter, BetMGM, DraftKings and Caesars Entertainment (US:CZR) were all profitable in the US in the second quarter, with Flutter an outlier in that it enjoyed profitability for the whole first half on an adjusted cash profit basis.
DraftKings led the way in revenue growth terms in the first six months of the year, with the Boston-based operator posting an 88 per cent uplift as it continues “to experience very strong trends in our more mature online sportsbook and iGaming states”. Flutter was the second-best performer – the company said last week that it had reached a “profitability inflexion point” after FanDuel went into the black on the back of a 63 per cent increase in revenues. FanDuel took 47 per cent of the US sportsbook market in the second quarter and grew its iGaming share to 23 per cent.
Over at Entain, its share of BetMGM’s half-year operating losses narrowed from £109mn to £49mn as revenues rose by 55 per cent. Guidance is for full-year net gaming revenues to come in at the upper end of a $1.8bn-$2bn range. BetMGM is currently active in 26 states and is set to have access to over half of the US population after new launches, according to management.
There are other reasons why the US market is attractive to London-listed operators, other than the headline growth on offer. Flutter’s management pointed to North America's deeper capital markets and greater liquidity when it disclosed plans for a secondary listing in New York, and a primary listing there could be on the table. The company obtained shareholder approval in the first half for a secondary listing and this is now expected to complete in the fourth quarter of this year or the first quarter of 2024.
Jefferies analysts have raised Flutter’s US cash profit forecasts for the company by 7, 17 and 44 per cent, respectively, for the three financial years to 2025, after building in the company’s estimates for 4-5 per cent growth in US population penetration in 2024 and 2025. The UK and Irish markets will remain the largest, but the US is catching up quickly – Jefferies sees Ebitda of £727mn in 2024 for the UK and Ireland, a 5 per cent increase on the 2023 forecast, while the US could go from £140mn to £497mn.
According to Peel Hunt, future success at the leading operators will come down to product differentiation and marketing control. “As the US businesses become profitable, and therefore self-financing, the access to group capital will probably stop being a competitive advantage. Success will be determined by product innovation and marketing efficiency,” the broker said.
One impact of North American growth could be significant deleveraging. Flutter had a net debt pile of approximately £4.6bn and a leverage ratio of 3.3 times at 30 June. The ratio was down from 3.9 times at the end of December.
Old-world headaches
Compared to the US growth, performance in European markets has been significantly more mixed for the London-listed operators. UK-focused 888 revealed in its interim results this week that its pro-forma UK and Ireland online revenues fell by over 9 per cent, while pro-forma international revenues plunged by 14 per cent due to regulatory challenges in Germany and compliance problems in the Middle East.
Elsewhere, the acquisition of Italian operator Sisal last August drove Flutter’s 85 per cent increase in international revenues. The company’s UK and Ireland division grew sales by 13 per cent, helped by a 10 per cent boost in average monthly online players. At Entain, UK sales fell slightly while Italy and rest of Europe revenues drove top-line growth.
One issue facing operators here is regulation, via both proactive policies designed to reduce problem gambling and investigations into past conduct. This was seen in Entain’s results when the company recorded a £585mn provision relating to an HMRC investigation into historic alleged bribery at its former Turkish business. The figure was much higher than the £200mn expected by broker Shore Capital.
In the UK, the government’s white paper on gambling sector reform, finally released in April, is causing headaches. Of the London-listed operators, 888 is the most exposed to tougher online betting rules given its revenue streams. The company flagged that one consequence of preparing for the implementation of white paper reforms was a “significant mix shift in the player base to lower spending groups” in its online division. Analysts think that Grosvenor and Mecca owner Rank Group (RNK), which is due to release full-year results on 17 August, is a UK winner from the changing government policy environment. The white paper recommends new £2-£15 limits for each throw of a slot machine, as well as tighter rules on online betting to stop people chasing large losses.
That is not to say that the regulatory environment in the US isn't causing problems for operators there to. Sports betting growth across the Atlantic has many detractors, with warnings of an escalation in gambling addiction issues. DraftKings was fined $500,000 in Ohio for its approach to advertising. Certain states could introduce much tougher policies, and an increase in litigation seems very likely.
But further growth also looks like a sure bet.
