DraftKings Unlikely to Acquire Entain, Says Citi Analyst

Posted on: October 11, 2021, 08:56h. 

Last updated on: October 11, 2021, 09:30h.

The big news currently surrounding DraftKings (NASDAQ:DKNG) is whether or not the online sportsbook operator will formalize a $22.4 billion cash and stock takeover proposal for Entain Plc (OTC:GMVHY). One analyst doesn’t see the courtship becoming a marriage.

DraftKings stock
Citi analyst Jason Bazinet is bullish on DraftKings stock. However, he doesn’t see the company buying Entain. (Image: Bloomberg)

In a note to clients today in which he initiates coverage of DraftKings stock, Citi analyst Jason Bazinet says he doesn’t expect the Boston-based gaming company will acquire the Ladbrokes owner. He starts coverage of DraftKings with a “buy” rating and a $66 price target. That implies upside of about 37.5 percent from the Oct. 8 close.

Last month, DraftKings stunned the gaming industry by making a $20.5 billion cash and equity offer for Entain, which the target rejected. The suitor later floated a cash/stock bid of $22.4 billion and has until Oct. 19 to make a formal offer.

An array of unknowns linger. For example, Entain partners with MGM Resorts International (NYSE:MGM) on the BetMGM business, and the casino giant needs to approve to any transaction that would result in a competing business. However, it’s not yet clear if DraftKings is angling for a piece of the deal, or if it’s targeting Entain for its technology capabilities, as some analysts have suggested.

Entain or Not, Reasons to Like DraftKings Stock

It remains to be seen if DraftKings can seal a deal for Entain. and there is some speculation that the suitor is merely floating offers to drive the price of the Coral owner higher, potentially forcing another buyer to overpay. Even without Entain, Citi’s Bazinet sees positive catalysts for DraftKings stock.

The firm has quickly captured a leading position in the rapidly growing US sports betting market. And we expect DraftKings to be a net beneficiary, as customer acquisition rationalizes and the market consolidates,” said the analyst. “We also believe current Street expectations for payer growth are reasonable.”

Broadly speaking, the sell-side is bullish on DraftKings, But thorny issues, such as lack of profitability, high customer acquisition costs, and marketing spending, weigh on some investors’ minds. On the other hand, it’s possible the value of DraftKings’ clients increases in exponential fashion.

“We estimate the value of a DraftKings sub will increase from $1,750 in 2021 to $4,900 by 2024. The appreciation in the EV per sub is driven by: 1) higher [average revenue per user], 2) higher gross profit margins and 3) lower [customer acquisition costs],” said Bazinet.

The analyst adds DraftKings will have just shy of three million daily users by 2023.

Other Betting Stocks Endorsed by Citi

Citi also starts coverage on sports betting data providers Genius Sports (NYSE:GENI) and Sportradar (NASDAQ:SRAD) with “buy” ratings.

A slew of Wall Street analysts are initiating coverage of Sportradar today, following the Swiss company’s September initial public offering (IPO).

“We expect the global [online sports betting] market to grow 17% per annum from 2019 to 2025 underpinned by faster growth in the US (due to regulatory tailwinds),” according to Citi. “We expect the iGaming market to grow at a similar pace of 16% per annum from 2019 to 2025.”