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DraftKings announced it was to acquire Golden Nugget Online Gaming an all-stock transaction worth about $1.56 billion. $GNOG is an online gambling company focused on iGaming.

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Market Reaction

  • Golden Nugget Online Gaming GNOG +50%
  • DraftKings DKNG 52.26 +0.67 +1%

What is iGaming

iGaming includes online sports betting, slots, poker, and other virtual gambling. GNOG only offers iGaming in the US, which does not help to establish a presence in Canada, where online gambling is reportedly expected to be legalized sometime in the near term. With SCR, PENN will have a leg up in Canada once online gambling is made legal. iGaming is popular and buying GNOG will only enhance DKNG's iGaming offerings.

Why the Deal?

Rival Penn National (PENN) last week said it plans to buy Canadian-based Score Media and Gaming (SCR) for $2 bln. This deal was probably in the works but brought forward because of that deal. DKNG has seen its revenue decline sequentially for the past two quarters but is cash rich. In its Q2 earnings call on Aug 6, DKNG stated that having ended the quarter with $2.6 bln in cash, the company is well-positioned to continue to explore opportunistic and accretive M&A.

This deal seems more one to dominate iGaming as DKNG already offers iGaming and in more states than GNOG does. GNOG is a solid player in the iGaming industry, growing revenue 54% to $26.7 mln in Q1 this year but did the PENN deal force them to overpay? DKNG grew revenue by over 250% in Q1. Canada province of Ontario represents 40% of Canada's population and would be the fifth-largest state by population if it were a US state.

A sidebar point is the all-stock transaction dilutes current DKNG shareholders and signals to the market that management believes GNOG's stock price is relatively high. The other opinion is use the high valuation and keep the cash for something else.

Expansion is a huge component for sports betting companies in continuing to add new customers and grow revenue. DKNG expanding into Canada without the power of a popular sports media company will be a significant obstacle moving forward, which cicrles back to the cash in hand.

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