PointsBet Holdings Limited (PBH) Earnings Call Transcript & Summary

Good morning. Welcome to the PointsBet Holdings Limited 2023 Extraordinary General Meeting. My name is Brett Paton, and I'm your Chair. We have a quorum, and I'm pleased to declare the meeting now open. I would like to welcome those shareholders who have joined us here today in person, together with those shareholders who are participating through our hybrid online meeting platform. I now request that all mobile phones be turned off or placed on silent. Thank you. Turning to the agenda for today's meeting. I note that there's -- it's now past 11 a.m. and that this is a properly constituted meeting. As a quorum for an extraordinary general meeting is present, I formally declare this 2023 meeting open. Let me now introduce you to the people who are with me this morning. In the room, we have our CEO and Managing Director, Sam Swanell, to my right; together with Nonexecutive Directors Peter McCluskey in the far left, Tony Symons. Also with us is our Group CFO, Andrew Mellor, to my right. Participating online are Nonexecutive Directors Becky Harris, Manjit Gombra Singh, Kosha Gada and William Grounds; together with our Group General Counsel and Company Secretary, Andrew Hensher. Thank you. The Notice of Meeting was distributed to all shareholders, and copies are also available online. I'll take the Notice of Meeting as read. As set out in the Notice of Meeting, voting will be decided on a poll. In order to provide everyone with an opportunity to vote and in case anyone cannot stay for the whole meeting, I will now formally declare the poll open for those who wish to vote. I will give plenty of notice before the end of the meeting to ensure that you are able to cast your vote. I'd like to introduce Assistant Company Secretary, Lara Doubell, to talk through the procedures for voting.

Good morning. Computershare, the share registrar of the company, is appointed to act as scrutineers, and Mr. Peter Renda is appointed as the returning officer for the purpose of the poll. For those in attendance in person, the blue voting cards handed out contains the resolution, and you should complete the cards before the end of the meeting. Shareholders who wish to abstain from voting and proxyholders who have been directed to abstain from voting do not need to complete the voting card. For those participating online, you can select the Vote icon at the top of your screen. You can then cast your vote, and you will see a vote confirmation. You can vote any time during the proceedings until voting is declared closed. You can also vote and change your vote at any time during the proceedings. Next slide. We will also take the opportunity for questions. [Operator Instructions] Please note that only shareholders, proxyholders or authorized shareholders may vote. Any undirected proxy votes given to the Chairman will be voted in favor of the resolution. Any directed proxies given to you by the shareholder will automatically be cast and directed when the poll is closed. Results will be released to the ASX after the conclusion of the meeting. Thank you.

Thank you, Lara. I will now move to the formal business of the meeting. Resolution 1, disposal of main undertaking the sale of our U.S. business. The proposal we are asking you today is to vote on -- is a critical step. It has followed a long process to determine the value of our U.S. operations, test the market to determine qualified buyers and extensive and what we believe to be successful negotiations to arrive at a transaction that allows a cash return to shareholders and an ongoing investment in the company with strong growth prospects. Why are we selling our U.S. business? The short answer is that having had some strategic success, the cost of competing against the largest companies of their type in the world meant the business would not be cash flow positive in the near term. Continuing to operate the U.S. business would require significant capital and further capital raises. This transaction addresses that uncertainty. Let me give you some more context. In May 2018, the U.S. Supreme Court effectively gave individual states to the authority to legalize and regulate sports betting. Our experience in Australia gave us the confidence to invest and enter the U.S. market, a market that would grow by some 800% since we first entered. In 2018, we began putting together the building blocks. We first built an experienced team. We formed the necessary partnerships with U.S. operators and established state market access agreements and partnerships with U.S. sporting leagues and teams. We accessed capital markets to fund the rapid expansion to gain an early mover advantage. We set out to build a leading tech platform that would deliver top-tier product customized for the North American market. It would focus on live betting in the U.S. where sports are 75% of all turnover and would occur when no one globally had previously focused. This product-led strategy was our right to win. We are 1 of only 9 companies to be granted a license in the critical New York market, and we're now live in 15 North American markets -- jurisdictions. We delivered this on our internal tech platform and showcased our leading product that has been independently ranked in the top 3 in the U.S. for the last 2 years. I believe it's important for shareholders to understand how valuable our PointsBet technology has become. It has been one of the critical features of the interest in our company by numerous groups we have spoken to. While I'll talk to you in more detail later, it bodes well for the value and future of the Australian and Canadian businesses. We knew the brand and database were our challenges. We did a significant marketing deal with NBCUniversal, one of the biggest sports media groups in the world, and we believed would address that challenge. Whilst NBC have some fantastic assets, our brand was starting with no recognition, and we couldn't make as much progress as we had hoped. Having said that, many of the largest established brands with substantial databases have also struggled. One has spent around USD 2.5 billion on their online aspirations after starting with a strong brand and database and have only achieved middle digit -- mid-single-digit market share. Other big spending online operators have gained even less traction. Many have closed. We doubt anybody expected FanDuel and DraftKings to become effectively a sports betting duopoly. It points to the huge incumbency benefits these companies have in the U.S. market. However, we are one of the only international operators to have gained a worthwhile market share. There are over 60 online sports betting operators in the market. Only 7 brands, including PointsBet, have a market share of more than 1%, with the remaining 53 companies testing -- competing for the rest. In the U.S., PointsBet has generally flexed in all our competitive strengths as a challenger business. We have used our technology to deliver a leading sports betting product experience, but our ability to get scale and operate at substantial scale was challenging. We've been competing in a very high-cost operating market with the overlay of capital pressures to continue funding the business through to profitability. At the same time, we, like other growth stocks, faced the impacts of rising interest rates on attracting investment. And as a result, investors have moved away from growth stocks, which negatively impacted our valuation and our ongoing ability to potentially fund our organic development. Given the market uncertainty and being acutely aware of our capital requirements to grow, we have continually been exploring strategic options for PointsBet. Once we decided to sell the U.S. business, we turned our attention to finding the right business partner. Fanatics identified in PointsBet many of the attributes needed to successfully enter the online market. In turn, Fanatics have a strong brand and an extensive sports customer base with a fanatical interest in sports. On May 15 this year, your directors announced PointsBet had entered into a binding agreement with Fanatics Betting Group -- Betting and Gaming for the sale of our U.S. business for a headline cash consideration of $150 million. From now on, to make things easier, I will talk in U.S. dollars as the currency. On Friday, the 16th of June, we received a nonbinding indicative offer from DraftKings for PointsBet's business -- U.S. business. The proposed $195 million was 30% premium to Fanatics' proposal of $150 million. On Monday, the 19th of June, PointsBet directors advised the ASX that we had considered the DraftKings proposal and, acting in good faith, had determined that the proposal could reasonably be expected to lead to a superior proposal. And as a result, we engaged. We gave DraftKings a period of due diligence to firm up a superior proposal. On Tuesday this week, Fanatics increased their offer by 50% or $75 million to $225 million. DraftKings was unable to finalize a binding offer by 6:00 p.m. this Tuesday. The Board unanimously supports the improved proposal from Fanatics, which provides superior price plus certainty. Let me summarize the details of the proposed sale of the U.S. business and what it means for PointsBet shareholders. You are being asked to approve the sale of the U.S. wagering business and iGaming operations in the U.S. to Fanatics for a cash consideration of $225 million. We intend to distribute capital to shareholders of approximately AUD 1.39 to AUD 1.44 a share. We expect to make the distribution to you over 2 tranches with the first tranche of this, approximately AUD 1 per share, expected to be paid in mid-September this year following the first amount received from Fanatics. The second distribution will be made following the final close. Should the vote be successful today, PointsBet funding requirements for the U.S. business will be capped at approximately USD 21 million from the conclusion of this meeting to the final completion of the proposed transaction. That's it. And as a shareholder, you'll keep a shareholding in PointsBet leading Australian business, a growing Canadian business, which remains listed on the ASX. The remaining company, PointsBet Holdings, post the completion of the sale of the U.S. business is currently expected to be at or around an EBITDA breakeven run rate. We expect the profitability of the Australian business to be significantly offset the near-term loss of the Canadian business. Importantly, your company will continue to own the sports wagering and iGaming technology platform that is the backbone of both Australian and North American business. In addition, PointsBet will retain a perpetual license to use and further develop the Banach Technology assets at no cost. The need for capital to fund the U.S. business will cease. As you would expect, should the vote be successful, we'll implement foreign exchange hedges given the Fanatics installment will be received in USD. In consideration -- in considering all the options and advice we've received, the Board unanimously recommends that shareholders vote in favor of the proposed Fanatics transaction. Each director has or will vote all shares held or controlled by them in favor of the proposed transaction. Proposed distribution. Let me talk a little further about this in detail. The distribution is subject to a number of conditions as detailed in the Notice of Meeting. The Board estimates shareholders will receive approximately AUD 1.39 to AUD 1.44 per share. The final amount of the proposed distribution will be determined by the Board during the completion of the sale and will depend on the following factors: one, finalization of proceeds received or paid by PointsBet during the purchase price adjustments; finalization of the amount of applicable taxes and transaction and restructuring costs payable on the proposed transaction; provision for future liabilities associated with the proposed transaction, if any; conversion of the net sale proceeds and approximate -- and corporate cash, as applicable, from U.S. dollars to Australian dollars; and finally, the number of fully paid ordinary shares on issue at the record date of the proposed distribution. The proposed distribution as described in the Notice of Meeting will require additional shareholder approval. PointsBet will begin the necessary steps to facilitate the proposed distribution in the coming months to meet the planned mid-September 1 distribution date. The new PointsBet. If the proposed sale is approved, PointsBet Holdings Limited will continue as an ASX-listed company owning the Australian and Canadian businesses. Importantly, we retain ownership of our proprietary sporting wagering and iGaming platform that is currently used in both Australia and North American markets. We will be granted a perpetual, royalty-free license to use and further develop the Banach Technology assets, including the underlying source code driving OddsFactory. This will give us options into the future to exploit PointsBet proprietary sports wagering and iGaming platform in other regions outside of the United States and in the U.S. beginning 18 months after completion of the proposed sale. The new PointsBet will have a very experienced leadership team. Scott Vanderwel has been the CEO of the Canadian business since August 2021. Prior to joining PointsBet, Scott oversaw corporate strategy, operational improvement and digital operations for a $32 billion communications and media company. Andrew Catterall has been Chief Executive of our Australian operations since July last year and has over 20 years' experience at senior levels of the sports and wagering industry. Andrew is here. So let me ask him to stand up. Thanks, Andrew. Of course, both report to Sam Swanell, Managing Director and Group CEO, and has been in the industry for 20 years. We will continue with a great team of leading technologists, traders, quants to service and grow the Australian and Canadian businesses. Over the coming months, we will set out our road map for the new PointsBet. After Fanatics' integration with our U.S. business, we will reorganize to remove the layers of overheads which were necessary to run a much larger company. We will simplify many of our core operations, workflows and resources and make Australia the center of a global technology. In both countries, the PointsBet -- the new PointsBet will grow market share. In Australia, PointsBet has a strong, well-recognized brand. In Canada, we are the challenger brand. Both have user-friendly leader technology and both will be well capitalized. In Canada, PointsBet is live in the sports wagering and iGaming market in Ontario. The Ontario market structure is attractive for sports and iGaming operators. For instance, there are no partner revenue share agreements unlike most U.S. states, nominal license fees and an effective tax rate of 18% of gross gaming revenue. The lower capital requirements and the higher operating margins relative to most U.S. states create a strong prospect for attractive future economics. Again, technology is our real competitive advantage in both markets. Following the sale of the U.S. business, PointsBet Holdings is currently expected to be at or around EBITDA breakeven with the profitability of the Australian business expected to significantly offset the expected near-term losses of the Canadian business as it builds scale. To summarize, the Board believes the proposed sale of the U.S. business delivers the most attractive risk-adjusted value outcome for PointsBet shareholders compared to the risks and benefits of PointsBet pursuing other potential options, including the status quo. Approval today will facilitate a significant return of capital to PointsBet shareholders while retaining exposure to PointsBet leading Australian business, growing Canadian business and world-class technology assets. Before we move to questions, let me say on behalf of your Board that we understand any disappointment about the share price performance of our company. As shareholders ourselves, both Sam and I and the Board understand any deep concern and frustration that have caused you. We would like to thank the team at Fanatics, especially Michael Rubin and Matt King. I want to particularly recognize our PointsBet U.S. staff who have worked tirelessly for shareholders and have a strong future under Fanatics. Finally, let me thank you for supporting, all of you, PointsBet through this journey. Let me move now to the vote. The resolution and a summary of the votes received before the meeting now appear on the screen. The directors recommend that shareholders vote in favor of the resolution. I now open for questions and discussion. Please note that questions should be limited to the resolution being put to shareholders today. The company will release its full year results in August. Therefore, I will be not -- I won't be able to answer any questions regarding the company's financial or trading performance today. Firstly, are there any questions from shareholders here in attendance? Lara, are there any written questions we've received?

Chair, we do have a few questions from a shareholder, Mr. Stephen Mayne. The first question being, "Well done on exiting a supercompetitive, loss-making U.S. market for a reasonable price. What is our net loss overall from entering the U.S. market, excluding any expenditure on the Canadian operations?"

Could you just recite that last part of the question?

Sure. What is our net loss overall from entering the U.S. market, excluding any expenditure on the Canadian operations?

I've got a fairly idea -- good idea of that, Stephen. But I might actually ask Andrew Mellor to comment.

Yes. Thanks for the question, Stephen. One thing just to point out is that we haven't disclosed all those final losses. As Brett referenced, we'll be releasing our financial results in August. So any disclosures we've made to date are only up until December. I think that what we can say is that there has been reasonable losses been incurred. We're very pleased with the outcome and appreciate your initial comments on that. But the goal was obviously to stabilize the company from a capital perspective given the ongoing losses from the U.S. But we'll be able to disclose more detail on what that final number is at our final results in August.

Thank you. Our next question from Mr. Mayne is, "In hindsight, do we regret doing the NBCUniversal advertising deal? Would our losses have been lower if we'd gone it alone? Who were the main executives who dealt with -- we dealt with at NBCUniversal? And are they happy from -- with our exit from the U.S. market?"

Let me have an initial response to that, Stephen, and then I might pass on to Sam Swanell and he can comment on behalf of the executive team. But the building blocks that we -- I referred to earlier in the presentation were creating the staff, having the right mix -- staff mix, getting market access agreements in place from the various states or operators in various states, such as casinos and racetracks. We then -- we're conscious, obviously, of a lack of brand and data. So the NBC, there was a -- we were fortunate to be on a [ pick ]. It was a very lengthy scoped out assignment. There were a number of parties who pitched to win the right to be NBC's sports betting partner. We were successful in actually winning that beauty parade. That was our journey to meet the customers in America. We didn't have a brand. We weren't a casino. We didn't have fantasy betting as a legacy. So it was the line of sight we had to customers, and they had some unique assets and some unique associations with sport. And they were branching out with lots of new products that were well suited to our offering. So that was the macro side, and I'll get Sam just to talk about some of the macro matters you referred to.

Yes. I think at the time -- obviously, we've got to think about what the environment looked like at the time. And to add to what Brett said, I think most operators in that market saw the NBC assets as a real gem, a real opportunity that could strengthen any operator's prospects in that market. For NBC to choose us at that time and to, obviously, take equity in our company at that time really talks to the fact that they believed in the partnership and what we could achieve together. Obviously, the market's reaction at the time was affirmative of that move. I think it talks to some of the challenges that we've faced. I think it comes back to the fact that, yes, as Brett said, we were starting from scratch, zero brand recognition. We've recognized that the DFS operators -- we're a sports betting-led organization. That was how we're going to win our market share, on the back of live betting, great product in the sports betting space and then cross-sell to the iGaming. And as Brett said in his announcement, in his remarks, FanDuel and DraftKings' inherent advantage from their DFS roots has just proven to be very, very strong. So look, in retrospect, who knows. But it was certainly the right decision at the time, and it just hasn't been enough for us to bridge that gap required to achieve the scale that we were aspiring to.

Thank you. The next question from Mr. Mayne is, "Why are we proposing such a large cash return rather than conserving cash for acquisition opportunities in Australia, such as buying [ Bet ]? Have we had any discussions with [ Bet ] or other smaller local competitors, such as BlueBet? Given the apocalypse of global competition in the U.S. market, could the Chair and CEO please comment on competitive pressures in the Australian sports gambling market and whether the proposed advertising ban is a major risk going forward as we concentrate on our operations in Australia?"

Okay. Thanks, Stephen. I might decompose that into 2 elements. In terms of -- I'll address the capital settings that we've basically settled on. The newco has limited capital requirements in Australia because it will be generating positive cash flow -- positive EBITDA going forward. We've analyzed the Canadian growth prospects and analyzed the capital that needs to be allocated to that mission. And bear in mind, we've got Ontario. But we're going to have other states -- or provinces, rather, that open up fortunately -- sequentially, fortunately, with relatively low-cost stapled opportunities in iGaming. In other words, licenses will carry the second license for iGaming, we assume. So the capital requirements are really designed to buffer the balance sheet so that we have very low, if no, prospect of ever having to come back to shareholders. As to M&A, just on the macro point of view, we do see opportunities as the advertising industry -- as government intervention in advertising may change the landscape and some of the economics for some of the operators. We do see an opportunity as some of the junior operators might, in time, come to organizations like ours and suggest that they can -- that we can actually find merit in the proposal. Stephen, for the meantime, from -- again, from a macro point of view, and I'll get Sam to get -- to have a bit more of a deep dive, but we just want our shareholders to see that we've settled down and return the capital, hit the pause button for a little while, make sure that exciting developments in Canada are done properly and with the right resourcing and the right allocation of technology without further distractions. We have been -- management's been amazed and impressed with the ability of the management just to keep going tirelessly and effectively and positively with a lot of moving parts, including this particular matter we're here today to vote on. So I think the capital settings are fine. They'll allow us to do things in the future, down the track. And we don't have -- we've got a lot of headroom with what we plan to leave in the balance sheet in terms of cash. Sam?

Yes. I think as it relates to the Australian macro environment and in relation to the government report that was handed down yesterday, we have a very strong brand in the Australian market. And obviously, we've got a high-profile ambassador in Shaquille O'Neal, and we've had really effective cut through in growing our brand in the last couple of years. We've got a fantastic product. We believe that product, with a more -- with more focus on it on behalf of the group -- I've said this many times. The U.S.A. was 14 of our 16 jurisdictions. It was complicated, high regulatory overheads attached to product velocity releases. So our road map gets far simpler when we start talking about a focus on the Australian market and the Canadian market. And our ability to use our first-class technology and concentrate to just deliver sustained outcomes, we think, is enhanced with, obviously, the sale of the U.S. business. We're a first -- as part of being a top-level product and a top-level operator, we have very high-level responsible gambling standards. We welcome stronger standards in these areas. We recognize the need for some change around advertising. The net-net of all that, as Brett alluded to, is there is a long tail of operators in the Australian market. It's just not possible for those long tail of operators to be compliant at the standard that we think the industry should be operating at. So we're very confident of our ability to grow our market share in Australia on the back of our increased focus. But we also think that operators coming up to the standard, which should be expected and which we operate at, will create some opportunities, will create some attrition in the marketplace and add to our ability to grow our market share.

Thanks, Sam. Next question from Mr. Mayne is, "Why is the share price only trading at around $1.75 if we're proposing to return up to $1.40 per share in cash to shareholders? Is our Australian business really worth that little? And have we considered doing a share consolidation so our shares don't trade at a low level below 50% -- sorry, $0.50?"

Do you mind just reading that last bit back to me?

Sure. Is our Australian business really worth that little? And have we considered doing a share consolidation so our shares don't trade at low levels below 50% -- sorry, $0.50?

Our share -- starting from the back first. If we did a share consolidation and created -- I guess it was like for every 5 shares, you have 1, and the shares will go from $1.70 x 5, $8.50. So in my time in capital markets, if you said to a company, "If you're going to do an IPO, what would be the right sort of share price to float the company at?" and there's lots of prevailing views about that. American investors, they don't like penny stocks. Australian investors do like penny stocks. So if I was giving advice to the federal government on the IPO of Telstra, for example, [ stake ] or the IPO of [indiscernible] or CSL, it would have been $2. 20 years ago, it would have been $1. I think Ashton Mining was floated -- might have been $0.50. But the market's moved to a position where -- to suit all people, what's the right sort of currency. So I think, Stephen, sitting around $1.70, I can't tell you -- I can't give guidance to this investor group in isolation. But look, call it $2, I think that's not a bad currency for the stock to be trading at. We do trade in adequate volumes on a daily basis. Take me back a little bit, Lara, to...