Does PointsBet’s New Deal Warrant A $2 Billion Valuation?

news Sep 03, 2020

Published by Anthony Di Pizio

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NBC Sports + PointsBet

US broadcaster NBC has agreed to make PointsBet Holdings (ASX:PBH) the official betting partner of its sports division, NBC Sports, with rights to various platforms across the network. Important deal points:

  • NBC currently has the largest sports audience in the US with 184 million viewers
  • PBH committed to spending US$393 million over 5 years on marketing with NBC, offset by an NBC equity subscription plus options to be (potentially) exercised
  • NBC takes on a 4.9% shareholding in PBH, with 66.88 million additional options maturing in 5 years
  • NBC has some key asset rights expiring in 2022, including NFL and English Premier League (EPL)

At face value, this deal is groundbreaking and it's not surprising PBH shares rose from $7.50 to $14.00 the day of the announcement, rocketing the company to an AU$2 billion market cap. However over the last 2 consecutive years, PBH has delivered losses of more than AU$40 million despite their client base and turnover figures growing significantly.

This places some doubt on their ability to turn aggressive spending into net earnings, which in the end is all that matters. 

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NBC Sports Rights

NBC Sports has a broad portfolio of assets covering multiple sports in multiple markets. This makes them the ideal partner for a bookmaker who traditionally offers action on most sports available in a given jurisdiction. 

There are some headwinds on the horizon, though. In 2022 some key rights to NBC's content including NFL and EPL will expire, and if they fail to hold onto them it could place strain on PointsBet's ability to generate a return on their investment.

In past years there wouldn't be much question surrounding NBC's ability to hold onto these assets, however we live in a new age of content delivery with enormous tech players trying to jostle their way into the arena. In April of this year, the NFL and Amazon announced a multi-year deal to expand their relationship, with Amazon Prime (and Twitch) slated to stream Thursday Night Football and one Saturday game in 2020 (11 games in total) - at no additional cost to their subscribers. 

In February, CNBC reported that Amazon, Apple, Netflix and Google were the favorites to disrupt traditional NFL broadcast deals in 2022. While the consensus is that current broadcast networks are likely to hold onto their rights, the Amazon deal proves that the NFL is willing to dip its toes into new platforms to reach more viewers. 

In 2017, social media platform Twitter was fighting for the rights to the Thursday Night Football games Amazon now holds. Although Twitter's bid failed, they still coughed up some money for smaller deal related to NFL news content, which shows how badly new age tech wants to be in the sports business. 

We're not here to make any rash predictions about where the rights will land, but we will say we expect a much bigger fight than most, because these technology platforms have a far bigger reach than traditional broadcasters and more eyeballs means more money, which is the language of the NFL. If not in 2022, it's only a matter of time before the balance of power shifts.  

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The PointsBet Business

PBH is growing rapidly and if you're a shareholder since the 2019 IPO, you're up about 650% right now. The metrics in the 2020 report are quite impressive, with turnover growing 103% to AU$1.15 billion and net win almost tripling:

However despite these overwhelmingly positive metrics, the company seems to be unable to transform them into a net win for shareholders, posting 2 consecutive yearly losses of AU$40 million. 

You can be forgiven for writing off 2020 due to the pandemic, but the point being made here is that PBH just committed to spending US$393 million on advertising in a brand new US market but is yet to prove up the business with returns. 

These financial results might be something investors need to get used to, as per the comments of PBH CEO Sam Swanell when asked by AFR Weekend whether the company will be profitable by the end of the NBC deal:

"I'm not going to say yes or provide any guidance on that."

"We could be making $100 million of EBITDA [earnings before interest, tax, depreciation and amortisation] and, if a state like California legalises sports betting, our marketing budget into that state would be more than $100 million per annum."

"It really depends on the pace and the order of which states open up. We basically give guidance that any jurisdiction that we go into ... we believe we can get it EBITDA positive in three years."

Credit Suisse certainly doesn't see positive earnings before 2025, downgrading the stock to underperform with a $6.50 price target. 

The company has also announced its intention to undertake a capital raise for approximately AU$300 million. As of today, September 3, we know the entitlement offer for existing shareholders will be 1 share for every 6.5 shares held, priced at $6.50. Approximately AU$150 million will be raised via this offer, with an additional AU$150 million to be raised by an institutional placement. 

We await further details on the institutional placement as this price may prove more indicative of market sentiment. 

Competition

Pointsbet has voiced their ambition to capture 10% of the US sports betting market, which is expected to be worth roughly US$8 billion by 2025. We think PBH's target is really high, given there are roughly 80 online bookmakers already operating in some capacity across the US (most with a very small presence), and 20 established, well known bookies located on the Las Vegas strip. 

The above does not account for new entrants to the US market, most of which will be well-established global powerhouses. For example, in February of this year William Hill closed a major deal to be the official wagering partner of CBS, another leading US sports broadcaster. In addition, the company recently completed its purchase of US sports betting outfit CG Technology and is now seeking to merge with longtime online casino partner Caesars Entertainment. 

In May of this year one of the world's biggest bookmakers, Bet365, inked a deal in Colorado with Century Casinos. Colorado is one of the places PointsBet has set up an office to serve US customers, and they've invested in local sports markets there too. 

PBH is up against enormous, globally established brands and it's hard to see a way they arrive at a 10% market share as the US industry continues to grow. 

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