Stock of the week - DraftKings (23.09.2021)

While indices around the world were recovering from Monday's rout yesterday, not every stock enjoyed gains. DraftKings (DKNG.US), the US sports betting company, finished Tuesday's trading over 7%. CNBC reported that the company is readying a massive over-20 billion USD acquisition to strengthen its position in the gambling sector. Let's take a closer look at this acquisition and involved companies.

DraftKings wants to acquire Entain

Shares of DraftKings (DKNG.US) slumped over 7% on Tuesday after CNBC reported that the company is exploring an acquisition of the UK sports betting company, Entain (ENT.UK). According to CNBC, DraftKings plans to make a £28 per share offer for the UK company, representing an over 40% premium over pre-announcement price (Monday's close). Payment would consist of £6.30 in cash and the remainder in DraftKings' stock. Previous offer of £25.00 per share was rejected by Entain's board. New offer is said to be carefully considered by Entain's management.

Huge expansion for DraftKings

Acquisition of Entain would massively increase the presence of DraftKings. Entain holds a license to operate in 27 countries. DraftKings also generates some of its revenue outside the United States but share of this international revenue in total revenues stood at slightly over 11% in 2020. DraftKings acquired Golden Nugget Online Gaming earlier this year in an attempt to attract more casino-type customers. Acquisition of Entain would help boost DraftKings presence in the sports betting sector.

This is another in a series of deals in the US gambling sector. Sector has experienced massive growth after the US Supreme Court said in 2018 that sports betting outside Nevada is no longer prohibited.

Will the acquisition go through?

A point to note is that Entain reached a daily high at £23.80 on Tuesday, the first trading day after M&A news hit the market. Stock launched trading on Wednesday near £25.00 and moved lower later on. £25.00 per share is a much lower value than £28.00 per share offered by DraftKings. This suggests that investors are not sure whether the merger will go through.

Concerns are not fully unjustified. Entain operates in the United States via BetMGM, a joint venture with MGM Resorts International (MGM.US). In turn, for any deal involving US assets of Entain, a consent from MGM would be required. This may be a large obstacle towards the deal as MGM and DraftKings are competitors and approving takeover would mean MGM helped its rival expand. MGM made its own takeover offer for Entain earlier this year amounting to $11 billion but was rejected by the UK company. Takeover price offered by DraftKings is twice as large. However, it is said that MGM may use its ability to block the deal to gain control over the BetMGM on favourable terms.

Three companies - MGM, Entain and DraftKings - are silent on details suggesting that talks are ongoing. Scrapping US assets of Entain from the deal will make it less appealing but may be the only way for the deal to go through.

A look at DraftKings (DKNG.US) chart at D1 interval shows us that a major technical pattern may be building up. Stock pulled back at the beginning of September after a failed attempt of breaking above the $64.00 handle, marked with a local high from October 2020. As a result, the right shoulder of the head and shoulders pattern may have been painted. Neckline of this pattern is marked with the upward trendline and this is a key support to watch. Breaking below could hint at a large downward move. Source: xStation5