Aussie battler PointsBet creates $2 billion out of nothing by storming the US

Is anyone else getting sick of seeing all those PointsBet ads during the 6pm news and major sports broadcasts, particularly the AFL? Well, stand by for an even bigger deluge as the upstart ASX listed sports gambling company last night unveiled a $303 million capital raising which will turbo-charge its extraordinary push into the emerging US sports gambling market.

PointsBet has come up with one of the most innovative and fair capital raising structures that we’ve seen in 2020 and the contrast with financial advice giant IOOF is stark indeed.

First things first, PointsBet demonstrated that selective placements of new shares should primarily be used for strategically compelling agreements with third parties who can add serious value to a company. 

In PointsBet’s case, the strategic partner was the US$206 billion US media giant Comcast. Comcast is being placed for 5% of the company as part of a US$393 million strategic marketing arrangement which will see PointsBet advertising feature across Comcast’s media outlets (primarily NBC) and sporting broadcasts over the next 5 years.

They own broadcast rights to the Superbowl, Nascar and a long list of other major events spanning golf, tennis and the Olympics, so this will give PointsBet a huge leg up in terms of accessing the emerging US sports gambling market.

The next unusual feature of Friday’s package of announcements by PointsBet was foreshadowing a $300 million capital raising but not settling on the price and allowing the market to factor in the positive impact of the Comcast deal.

And boy was it positive, with PointsBet shares rocketing from $7.50 to $14 on Friday, after hitting a high of $16.40. Comcast has agreed to some bullish provisions in its PointsBet deal, namely options to spend up to $870 million acquiring 30% of the company at $13 a pop. 

It has been a remarkable turnaround. PointsBet only floated at $2 a share in May last year and hit a low of $1.19 in March this year. Investors have made a fortune out of the dramatic increase in online gambling during the COVID-19 lockdown, the merger of rivals Sportsbet and BetEasy in the congested Australian market, plus its clever deal-making in the US.

The surge was all the more remarkable because it coincided with PointsBet announcing a $51.5 million statutory loss for 2019-20 last Friday, joining this extraordinary list of 389 companies which announced losses over the last two days of the reporting season.

Normally in these situations, the stock goes into a trading halt and investors scratch their heads trying to value the impact of the results and the strategic deal while given a few hours to decide whether to commit to the accelerated capital raising. 

That’s precisely what happened with IOOF this week when it announced the shock $1.44 billion of MLC off NAB on Monday, went into a trading halt and raised $734 million from institutional investors over the next 48 hours in a gun-to-the-head capital raising comprising an institutional placement and a non-renounceable entitlement offer where non-participants received no compensation for their rights.

IOOF has clearly overpaid for MLC. The stock duly tanked 22% when trading resumed yesterday, leaving the company’s circa 60,000 retail shareholders badly diluted and significantly out of pocket no matter what happens in the upcoming $356 million retail offer.

Amidst this $40 billion deluge of more than 150 COVID-19 capital raisings so far this year, Pointsbet is only the third company to do a pro-rata renounceable PAITREO offer (Tabcorp and Sydney Airport were the other two).

It was also the first to foreshadow a raising while allowing trade to continue as the details were finalised. This gave investors six days, including three days of trading, to consider their position, digest the $51 million annual loss and assess the trailblazing NBC deal.

Pointsbet shares closed at $13.69 last night, valuing the company at $2.1 billion, and trading will resume on Friday once the institutional component of the $303 million raising is completed. 

The raising comprises a $150 million placement at a price to be determined by a competitive auction, plus a $153 million pro-rata renounceable PAITREO offer at $6.50.

The size of the discount doesn’t matter because it is a PAITREO offer, which means non-participants will be able to sell their rights on market or be compensated through an auction of the shortfall at the conclusion of the retail offer. There have been 34 PAITREOs since 2010 and it is the fairest way to raise capital.

Finally, The Lines published an interesting US take on what the NBC-PointsBet deal means for both companies and the broader US sports gambling market. They will be competing full on with the Murdoch family’s Fox Bet joint venture with Flutter Entertainment, the world’s biggest online gambling company and owner of Sportsbet in Australia.

Given the value that PointsBet has created out of nothing, it makes you wonder why Tabcorp isn’t also trying to crack the US sports gambling market.

Perhaps that would have happened if PointsBet chair Brett Paton, a former UBS and Citi investment banker, had stuck around on the Tabcorp board rather than using his experience in the gambling industry to help an upstart competitor.

Paton’s 11.5 million PointsBet shares were worth a tasty $160 million based on Friday’s closing price of $14.