Welcome to the October 2021 newsletter for the Waterhouse VC Fund.

The Fund specialises in global publicly listed and private businesses related to wagering and gaming. The Waterhouse family has been involved in these industries for over 100 years, and the family’s experience, contacts, and capital provide opportunities that most funds would neither appreciate nor have access to.

Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 1,966% (assuming the reinvestment of all distributions). The unit price is $20.65, as at 30 September 2021. See our long-term performance table at the end of this newsletter.

Cashing in on controversy

Personality based marketing is something we are familiar with at Tomwaterhouse.com. It's much easier to love, or hate, a real person rather than a faceless corporation. This strategy has been similarly employed by Dave Portnoy, “El Presidente” of Barstool Sports.

"Probably the strangest marketing I’ve ever seen in my time.”

Barstool is the popular sports & pop culture blog that built a brand on the back of authentic personalities and ‘strange’ content, like pizza reviews and live-streamed day trading. After their acquisition by Penn National Gaming, they're converting these fans into online betting customers and revenue very successfully.

*Dave Portnoy’s live streamed stock trading, one of many marketing stunts that have gone viral. Source: Twitter*

Penn’s ‘One Stop Shop’

Penn National Gaming is among a few 'Tier 2' operators challenging the dominance of FanDuel and DraftKings. Before the 2018 repeal of PASPA and their investment in Barstool Sports, Penn was a land-based casino operator with 43 physical destinations across the U.S. The company counts nearly 9,000 hotel rooms, 44,000 slot machines and 1,300 tables across its sites.

While we generally prefer online-focused operators due to their lower capital requirements for growth, we have an appreciation for Penn's vertically integrated strategy of land-based casinos, hotels, media brands, and online sportsbooks. Being a ‘one stop shop’ allows for significant cross-sell and retention opportunities between the casino and media customer databases into their online sportsbooks. An example could be to allow a sportsbook customer to use their digital wallet for both online betting and in-person slots, or the ability to earn loyalty rewards from both hotel stays and online gambling.

*Penn’s recently opened Barstool Sportsbook in Detroit’s Greektown Casino Hotel*

Barstool Sportsbook has so far been successful in turning fans into bets, and bets into revenue. In the first three states where Penn’s Barstool Sportsbook gained market access, they achieved a CPA under $100, crediting their personality-driven acquisition strategy over TV and radio marketing. As discussed in our May newsletter, U.S. operators are currently spending up to $1,000 per customer.

Their customer base also over indexes for younger, casual punters, which means smaller average bet sizes but keeping more of their turnover as winnings. If they can retain these younger bettors in their ecosystem, it will mean higher lifetime values, though this remains to be seen. Either way, starting with such an unfair advantage in the customer acquisition department is how Penn/Barstool can compete with the much larger budgets of the top three players.

Another score

In August 2021, Penn increased their bet on media through their US$2 billion acquisition of theScore Media. theScore has four million daily active users and has developed its own online gaming technology in-house. This technology will be integrated with the Barstool Sportsbook to increase operating margins by allowing Penn to scale down contracts with third party technology providers such as Kambi.

Penn’s CEO, Jay Snowden, noted that “The transaction provides us with a path to full control of our own tech stack. theScore has developed a state-of-the-art player account management system and is finalising the development of an in-house managed risk and trading service platform”.

The benefits of integrating the tech stack will increase as the Barstool Sportsbook expands its operations beyond their current 9 states. theScore is a top three sports media brand in both the U.S. and Canada, with the most engaged audience.

*Penn National Acquisition of theScore Investor Presentation*

Well-positioned for industry consolidation

The valuations of media businesses exposed to US wagering have continued to lift with industry consolidation, with Penn arguably having the greatest exposure to this tailwind considering their ownership of Barstool and theScore.

Penn’s business is highly profitable, despite tough conditions for their land-based casinos due to Covid-19. We believe that Penn will generate around US$2 billion of EBITDA in 2021 (valuing the business at only 8x EBITDA) and enviable free cash flow. This cash flow can be used to fund customer acquisition and technological development to accelerate the growth of the Barstool Sportsbook.

*Source: Penn National Second Quarter 2021 Investor Presentation*

As profitability continues to increase, Penn is also slowly deleveraging their balance sheet. The company’s leverage ratio has fallen from 5.8x in 2019 to 4x in 2021. Deleveraging will give Penn the optionality to accelerate growth aspirations, particularly for the Barstool Sportsbook.

Media: SBC News

SBC News interviewed Tom about Waterhouse VC’s focus on businesses that ‘dominate their niche’. Tom discussed why he’s most excited about the continued growth of US wagering and the emergence of the Metaverse. Check out the article here.

For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc.

Please note the above information in relation to DraftKings, Entain, Flutter Entertainment, Kambi and Penn National is based on publicly available information in relation to the companies and should not be considered nor construed as financial product advice. The Fund currently has a position in Flutter Entertainment and Penn National. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.