Bet On It: Accel Entertainment aims to turn horse track into entertainment hub

Welcome to the latest edition of “Bet On It,” where The Fly looks at news and activity in the sports betting and iGaming space.

SECTOR NEWS: Penn Entertainment (PENN) CEO Jay Snowden told staff members in an internal email that the company will lay off about 100 employees as it focuses on growth for ESPN Bet, reported CNBC’s Contessa Brewer. The casino and sports betting company reportedly employs about 20,000 people.

BetMGM, an iGaming and sports betting operator run under partnership between MGM Resorts (MGM) and Entain Plc (GMVHF), announced the launch of mobile sports betting operations across Washington, D.C. “Previously accessible within only a two-block radius of the sportsbook’s location at Nationals Park, sports fans district-wide now have access to the BetMGM sports wagering experience along with rewards tied to both MGM Resorts and Marriott Bonvoy destinations,” the company stated. Caesars (CZR) also announced that its flagship mobile sports wagering platform, Caesars Sportsbook, is expanding its reach across the nation’s capital. “Starting today, sports fans 21 and older can download the Caesars Sportsbook app on iOS and Android, or access it via desktop, district-wide – except on federal lands and designated areas surrounding other professional sports venues,” the company stated.

Accel Entertainment (ACEL) and Fairmount Holdings announced that the companies have entered into an agreement for Accel to acquire Fairmount, the owner of FanDuel Sportsbook & Horse Racing, for total consideration of approximately $35M, payable to the sellers as 3.45M shares of Accel Class A-1 common stock. During the year ended December 31, 2023, Fairmount generated $29M of revenue and modest adjusted EBITDA. Accel plans to invest $85M-$95M to fund temporary and then permanent casino construction and modest track investments. Accel’s five-year forecast suggests an adjusted EBITDA potential of $20M-$25M and over 75% free cash flow conversion – pointing to a compelling cash flow return on capital. The asset will be the cornerstone in a local gaming platform that builds on Accel’s capabilities and strengths as a leading route-based operator. The all-equity offer for Fairmount of 3.45M shares of Accel Class A-1 common stock represents a total enterprise value of approximately $35M, based on a trailing 20-day average. Accel expects the acquisition to accelerate its long-term financial model with high return growth at accretive margins. Upfront buildout costs will be funded from Accel’s existing revolver facility. The closing of the transaction is subject to customary closing conditions and customary approvals from the Illinois Racing Board and the Illinois Gaming Board. Closing is expected in the fourth quarter of 2024. The transaction has been approved by Accel’s board of directors and the board of directors and shareholders of Fairmount Holdings.

EARNINGS PREVIEW: With a stable online sports betting, or OSB, market hold, Macquarie anticipates a 39% year-over-year, volume increase, leading to slight market outperformance. Additionally, the firm projects North America online gross gaming revenue, or GGR, to grow by 34% YoY, with OSB contributing 39% and iGaming 27% YoY. Based on New York data, Macquarie contends the hold is neutral for DraftKings (DKNG), Flutter Entertainment (FLUT), and Rush Street International (RSI) on a YoY basis, but a drag for Caesars and MGM. Consequently, it is expected that the North American segments for DraftKings, Flutter, and RSI to outperform in the second quarter, according to the firm. The second half of the started with an 11% New York hold rate for the first week of July,. For July and August, the firm expects over 20% same-store handle growth in the U.S., with less hold volatility and higher rates due to the baseball season. September typically accounts for about 50% of third-quarter volumes and can be hold-volatile. Positively, we anticipate sports betting to continue its mainstream rise during the football season, Macquarie told investors in a research note. For 2024, the firm forecasts market OSB GGR to grow by 34% and iGaming by 24% YoY. DraftKings and Genius Sports (GENI) are considered top picks by the firm.

NLCGS: The National Council of Legislators from Gaming States conference in Pittsburgh will spotlight the latest online casino discussions, according to Matthew Kredell of PlayUSA.. The conference will feature three panels dedicated to exploring iGaming model legislation. The first panel will include legislators, the second will feature regulators, and the third will gather suggestions from private industry. Key topics will cover cannibalization, tax rates, and the optimal number of licenses and skins. “What we plan to do at the conference is provide an overview of the top-line issues we’re working on for the model legislation,” NCLGS President Shawn Fluharty, a West Virginia delegate, told PlayUSA. “Then we’ll produce a final version of the legislation to have in place before legislative sessions begin in the fall and winter.” The four-day NCLGS conference, which began Wednesday, also features talks on responsible gaming, Pennsylvania’s gaming market, skill games, NCAA player protections in sports wagering, protecting sports bettors and Indian gaming.

ADDITIONAL ANALYST COMMENTARY:

Truist made the following changes as part of broader note the upcoming second quarter:

• lowered the firm’s price target on Everi Holdings (EVRI) to $10 from $11 and keeps a Hold rating
• raised its price target on Light & Wonder (LNW) to $120 from $115 and kept a Buy rating
• cut its price target on Golden Entertainment (GDEN) to $40 from $43 and maintained a Buy rating
• upped the firm’s price target on Churchill Downs (CHDN) to $165 from $145 and backed a Buy rating
• decreased its price target on DraftKings to $53 from $55 and reaffirmed a Buy rating
• increased its price target on Red Rock Resorts (RRR) to $64 from $60 and reinstated a Hold rating

Investors are fearing an “ever-looming” consumer pullback, though Gaming fundamentals have largely held up despite persistent macro pressures, the analyst told investors. Las Vegas Locals dynamics remain an area of interest given the effect that Red Rock’s Durango opening had on promo levels in the market, and while it remains unclear what cannibalization has looked like across the company’s other properties, after some pullback in mid-Q2, the stock has rebounded to a near five-year high, the firm added.

JPMorgan downgraded Melco Resorts (MLCO) to Neutral from Overweight with a price target of $7, down from $10. While the company likely grew Q2 table gross gaming revenues market share quarter-over-quarter, the result is below JPMorgan’s prior forecast and most likely came with higher premium mass promotional and reinvestment activity, resulting in lower net revenue conversion and weaker EBITDA, the analyst contended. The firm thinks most of the U.S.-centric Macau operators will report “mostly uninspiring” Macau Q2 EBITDA results. It also assumes higher promotional activity for Melco Resorts continues going forward.

JMP Securities updated their price targets on a number of companies in the space:

• raised the firm’s price target on MGM Resorts to $59 from $58 and reissued an Outperform rating
• axed its price target on Golden Entertainment to $39 from $42 and kept an Outperform rating
• increased its price target on Churchill Downs to $158 from $156 and reiterated an Outperform rating
• diminished the firm’s price target on Caesars to $58 from $60 and keeps an Outperform rating on the shares

The firm expects Q2 results to be “more of the same,” with revenue trending up 2% in regionals, but not enough to offset the increasing costs, according to the analyst. Gaming companies will start to lap the start of the weakness at the lower end of the database, weather-related events, and inflationary impacts on the cost structure, while spend per adult remains consistent, and the year over year easing from these factors will result in a modest uptick in 2H24 revenue, driving an improved profitability outlook for gaming stocks, trading near five-year lows for valuation, JMP said.

Scotiabank raised the firm’s price target on Gaming and Leisure Properties (GLPI) to $50 from $48 and held a Sector Perform rating on the shares. The company recently entered into a $395M sale leaseback and a ~1.2B development transaction with Bally’s (BALY). While the firm views this as an accretive transaction for the company, Scotiabank has concerns regarding its counterparty.

Wells Fargo raised the firm’s price target on Bally’s to $11 from $9 and kept an Underweight rating on the shares. On Friday, Bally’s announced multiple transactions with Gaming and Leisure Properties that will provide financing for its $1.1B in remaining Chicago casino building costs. Transaction multiples were solid, but the firm wonders if or how this impacts the outstanding $15/share takeout offer.

Susquehanna analyst Joseph Stauff downgraded Caesars to Negative from Neutral with a price target of $33, down from $44. The analyst believes the stock’s underperformance versus MGM Resorts (MGM) is very likely to continue. The firm views Caesars’ portfolio as “notably disadvantaged” versus MGM given its “lower-end customer base and lower-quality assets,” especially considering investor concerns of weakness at the lower-end of customer demand. Caesars’ investments in its regional and digital segments over the past few years have limited its ability to reinvest in its Las Vegas business while MGM has accelerated its investment, the analyst told investors in a research note. Susquehanna added that Q2 regional data suggest a “growing disparity in growth” between Caesars and peers.

PUBLICLY TRADED COMPANIES IN THE SPACE INCLUDE: Accel Entertainment (ACEL), Bally’s (BALY), Boyd Gaming (BYD), Caesars (CZR), Churchill Downs (CHDN), DraftKings (DKNG), Flutter Entertainment (FLUT), Gambling.com (GAMB), Gan Limited (GAN), Genius Sports (GENI), Las Vegas Sands (LVS), MGM Resorts (MGM), Penn Entertainment (PENN), Rush Street Interactive (RSI), Super Group (SGHC) and Wynn Resorts (WYNN).