DRF Purchasers Look at the Blue Sky

After what was rumored to be a great deal of time, the DRF finally sold. Details of the deal were not announced, but speculating, it was likely for less than the (again) rumored $100M asking price.

Being a private company, it's very difficult for us to value the DRF based on discounted cash flow. What we do know about their cash flow, however, is that it relies primarily on PP sales, advertising and a margin on each dollar bet. All three of those things are not high growth. In fact, a probable argument can be made that at least two of three are in or approaching a negative growth phase.

What appears to interest this new group are a couple of characteristics that could be blue sky:
  • “The big opportunity for us is to digitize the print side of the business, which the former owners started to do—it's expensive and there is still a way to go to make it fully function, and then the online gaming offering,” said Z Capital Group CEO James Zenni
On the surface it looks like the plan is to embrace and enhance the DRF as a data company. Data is worth something and the DRF has it.

Secondarily - and more long term as well as blue sky - is 'online gaming'. They seem to feel that owning a brand like the DRF can give it first mover advantage in sports betting, or other gaming offerings, should laws be relaxed.

Again, without knowing the DRF's total revenue, historical growth (or negative growth) rates, we can't make an assumption on what percentage of the purchase price is a blue sky premium, but in my view it's probably pretty formidable.

Data companies are being created and gobbled up as a matter of course - in DFS and sports. They clearly feel there is some upside here. And, as we all know, the skill game gambling market - esports, sports, DFS, exchanges, etc - is growing, unlike old-school hit and hope gambling markets. What happens in this space over the next few decades is anyone's guess, but it seems this private equity group is positioning itself for it, and thinks it's worth the risk.

For horse racing itself I believe this is not a deal that will send too many shockwaves through how we consume and enjoy the sport. However, Stronach and CDI are probably not fans of these new kids on the block.

Have a nice Wednesday everyone.

1 comment:

Anonymous said...

Z Capital Group, I find, is into a lot of things. A typical mode seems to buy a chunk of a business stuck in a debt trap, then later buy the whole. So there we have SIG/DRF.

The buyer is, surprisingly to me anyway, an outfit that own casinos. You know, the US business that could take or leave horse racing? Zenni has noted the group does own print companies already – interesting, though if the price was right, it makes sense. I doubt DRF print media would be emphasized, but at least they have people on board with the experience.

Zenni said he had been watching DRF after looking at them 4-5 years ago when an auction for the DRF parent was being planned but never happened. The buyer had defaulted on its leveraged buyout then, and the last owners are actually the banks. So, I will guess that the Z group got DRF for a price that insures continuity at its current level of business. So, it looks like the bank debt load is gone and DRF can move into the 21st Century.

He also noted the idea of digitizing DRF (whatever that could mean) was started despite being cash-poor, but not completed. That could imply that the new owners would pursue that idea first and foremost, although that’s the way of the world today, anyway.

In an interview on MSN, Zenni talked more about gaming in general. He also talked elsewhere about possibly expanding DRF to include sports. That’s likely contingent on how Congress rules on legalized sports, but it’s a no-brainer regardless. So sports betting/FSB, I think, is the major aim. DRF already has national news coverage and a distribution network in place, however shrunken it is nowadays. That’s good for an aggressive move into the sports betting/FSB market. Hopefully racing benefits as well, since DRF will probably be the test bed for data sales and products.

Yet there’s always a possibility of flipping DRF if someone walks in with too much cash and not enough brains when/if sports betting gets legalized.

Cynic that I am, I like the sound/smell/taste/look of this. Z Capital, give CDI and Stronach nightmares, please?

-- Eudaemon


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