PointsBet (ASX:PBH): After failing to crack the lucrative US market, its now the subject of a takeover war

PointsBet (ASX:PBH) investors have had a tumultous 24 hours, first in hearing that Matt Tripp’s Betr (listed on the ASX through its merger with BlueBet) had bought 19.9% of the company, and then hours later that it intends to buy the rest of the company. And all this after having previously agreed to another takeover offer.

The home-grown PointsBet had long-held ambitions to crack the US betting market, but bit the dust earlier in 2023, signing a deal to sell its US business for A$222m. The company had a good Australian business and persisted with it, but the betting industry in Australia is highly competitive. Plus the damage of admitting to failure in America remained.

And so Mixi made a $1.06 per share bid, a 27.7% premium and the board had agreed to it. But now, Betr has come through and offered $1.33 per share, offering $360m all up – $260m in cash and $100m in Betr shares. While PointsBet has not yet commented, Betr has claimed to have spoken to some of PBH’s largest shareholders and claimed they now back the bid.

Wherever things go from here, we think it is worth looking back on how we got here.

 

PointsBet’s American dreams

PointsBet was founded in Australia in 2015 and listed on the ASX in mid-2019 at $2 per share. Shareholders have been on a rollercoaster ride since then, albeit mostly down since the peak in 2021.

PointsBet had ambitions to enter the US sports betting market. You see, sports betting over there is way behind Australia with the practice only legalised in 2018, with America’s Supreme Court striking down a law preventing individual states (except Nevada) legalising sports betting. Five years on, only 33 states and the District of Columbia had legalised sports betting.

But the roll out was slower than investors anticipated and the company struggled to make money. It couldn’t enter all the states it wanted to because some states only allowed in-person betting and it had to pay licensing fees to states, not to mention significant marketing costs. By May 2023, PointsBet was only in 15 US states.

 

 

 

Giving up the dream

In 2023, the company announced it was selling its business to Florida-based Fanatics. You probably know that company for its sports merchandise business, but the US$31bn company also has sports betting operations. Effectively, this was a concession that the company couldn’t make it and it admitted as such in media interview earlier this week.

Consensus estimates only had EBITDA profitability in FY27, with cumulative EBITDA losses of $557m up until then. Inevitably, the company would’ve needed further cash, and it would’ve been very difficult to raise.

 

It is difficult to make it in America

Beyond the ultra-competitive nature of the American betting market, we would highlight that any Australian company trying to make it in the US will have it difficult. It is a big market indeed representing a greater opportunity. But you are competing with local companies and other foreign companies seeking to make it.

Companies such as CSL (ASX:CSL) and ResMed (ASX:RMD) illustrate that it is not impossible and that windfall gains can be made beyond what could be made from Australia alone. But even these companies have taken time to mature in these markets.

It is safer to invest in companies that have already made it in America. If you wish to take a risk, it is better to invest in a company that is profitable from its existing operations and is targeting a less competitive market over there.

 

Where to now? Selling out itself

PointsBet kept its Australian and Canadian businesses and will be granted a perpetual, royalty-free license to exploit its technology assets in all regions bar the US. Although the local business is in somewhat better shape, Australia is a competitive market that is at a mature growth phase. And the gambling sector isn’t exactly in good shape, shunned by ESG investors, subject to significant regulation, potentially vulnerable to new regulations.

We would remind investors that PointsBet had been trying to sell its business to Betr a few years back, but the talks broke down, another point highlighting the difficult state of the market.

In late February, the company agreed to be taken over by Japan’s Mixi (which is behind betM in Australia) for $353m, representing $1.06 per share in cash. BlueBet had made proposals at $1.14 per share but this had been rejected on the basis that it was conditional and did not include funding certainty, notwithstanding that some investors preferred it just because it was higher.

Well now, a couple of months later, BlueBet came back, buying 19.9% of PBH and pledging $1.33 to buy the other 80%. Moreover, Betr/BlueBet now offers funding certainty with NAB having pledged $120m in debt finance and claiming to have secured a non-binding deal to sell its Canadian assets. BlueBet will raise $130m in equity to fund the deal, including buying the initial 19.9%.

‘Our proposal is supported by materially enhanced funding security, and as the largest shareholder in PointsBet, we now intend to vote our holding against the current MIXI proposal, reducing its likelihood of success” Betr chairman Matthew Tripp said.

“I am confident PointsBet shareholders will recognise the benefits of our proposal as we work towards again becoming leaders in the Australian wagering market.”

Betr CEO Andrew Menz commented: ‘The transaction provides a clear pathway for Betr to become the clear number four wagering player in the Australian market, within the 10-15% market share ‘sweet spot’.

Only time will tell there, but there’s no denying the new deal is superior for investors, particularly those just wanting cash and to get out. For investors wishing to persist with the industry, either knocking back the deal or maybe staying on as investors of BlueBet, it remains to be seen if the company can indeed carve out its niche.

 

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