DraftKings (NASDAQ:DKNG) announced on Aug. 9 that it will purchase Golden Nugget Online Gaming (NASDAQ:GNOG) in an all-stock transaction. Upon the closing of the deal, each GNOG shareholder will get 0.365 of a share of DKNG stock for every share of Golden Nugget they own.
Since DKNG stock traded for $48.65 as of the close of Oct. 18, this implies that GNOG is worth $17.75 per share (i.e., 0.365 x $48.65). That is a pretty good deal for Golden Nugget shareholders. Last year, the stock closed at $19.70.
Golden Nugget stock is down year-to-date (YTD) by nearly 12% — or by $2.20 — to $17.50 as of the close of Oct. 18. However, by the time the deal closes in the first quarter of 2022, investors in GNOG stock will only have a loss of $1.95 for the year, or negative 9.9%.
DKNG Stock: How DraftKings Benefits From GNOG
The closing value of the deal, according to the announcement, is worth $1.56 billion. In addition, GNOG also has $204.1 million in cash and securities on its balance sheet (along with $132.94 million in debt) based on its 10-Q (Page 2). So, the net cash available is $71.16 million.
Moreover, Golden Nugget also produced $31.69 million in revenue during Q2. Now, analysts expect the company to make $129 million in revenue this year and $202.2 million in 2022, according to Seeking Alpha. This shows that sales growth will be 56.7% next year.
Therefore, that implies that DraftKings is paying just 7.71 times sales. And after deducting the $71.16 million in net cash, the enterprise value (EV)-to-sales multiple is 7.36 times.
That is a pretty good value, especially since GNOG is forecast to have revenue growth of nearly 57% next year to $202.2 million. DraftKings is forecast to have $1.77 billion by 2022. So, this will increase the company’s sales by about 11.4% in 2022.
In addition, because it looks like there will not be too much dilution, I estimate there will be about 87.88 million shares issued (i.e., $1.56 billion / $17.75). That represents only about 21.79% pre-deal dilution, since DKNG stock had 403.298 million shares outstanding as of Aug. 4, according to its latest 10-Q (Page 1). Therefore, after the deal closes, total dilution should just be about 17.9% (i.e., 87.88 million / (403.298 million + 87.88 million)).
Having to issue just 17.9% more shares for a company that will increase sales by 11.4% is not a bad deal. Ideally, you want to issue one dollar of stock for one dollar in sales. But paying a little over that is also not the worst thing when the purchased company has fast growth.
Where This Leaves DKNG Stock
Analysts seem to be positive about the merger deal as well. One analyst at Seeking Alpha noted DKNG stock looks like a worthwhile buy as a result of the merger. The analyst pointed out all the synergies and cost benefits that the deal will provide.
In addition, DraftKings CEO Jason Robins recently told a podcast that he likes the deal for several reasons. One of those points? Both companies have different demographics, so their merger will be complementary in terms of betting audiences.
Robins also addressed the fact that the company gets an added benefit by being associated with Tilman Fertitta, the owner of Golden Nugget’s physical casinos as well as the Houston Rockets and high-end restaurant chain Landry’s. DKNG will get access to all of these assets when it comes to marketing their betting operations.
Here is what the CEO said about this access:
“As part of this deal, we were able to get a commercial relationship with all those entities. And those are all really good partners to have between the database access, the access to having marketing and signage and the brick-and-mortar settings. The Rockets obviously are […] in a very large metropolitan area in a very large state and are a very popular team […] So a lot of things to like, even outside of the Golden Nugget Online Gaming asset itself, which of course we’re very excited about.”
What to Do with DraftKings
In my last article, I wrote that DKNG stock is worth $80.93 per share. This is based on a 15 times EV-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple using the company’s projected 2025 figures. That represents a potential upside of 66% or so from where DKNG closed on Oct. 18.
I am sticking with this valuation for now, especially since I think the Golden Nugget Online Gaming deal only adds to the value proposition for DraftKings.
As a result, investors might want to begin taking a stake before the deal closes. Once DKNG stock starts to reflect the upside in the deal, it may be worth even more over time.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.