Walt Disney (DIS -1.02%) has recently entertained the idea of entering the sports gambling industry. Under former CEO Bob Iger, the company was not interested in potentially muddying the family-friendly brand image by getting into the business of gambling.
New CEO Bob Chapek seems more open to the idea, saying, "Sports betting [is] a significant opportunity for the company." Disney already owns a minority stake in sports gambling company DraftKings (DKNG 0.59%). Making an offer for the rest of the company could be a potential entry point into the industry for Disney. But is it a good idea?
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A Disney-DraftKings combination could make sense
The decision may appear more compelling because DraftKings stock is down 81% off its highs from early 2021. With brick-and-mortar casinos reopening, DraftKings faces headwinds against the previously rapid growth rates of the pandemic lockdowns. The market has shunned unprofitable growth stocks, and DraftKings generates massive losses on the bottom line.
Interestingly, one of DraftKings' most considerable expenses is sales and marketing. Since it is a gambling company, it must gain approval to operate in each state. So far, it has gained access and is operational with sports betting in 17 states across the U.S. With each new launch, DraftKings invests aggressively in marketing to let the local population know it is now legal to bet on sports, and that DraftKings is an excellent place to start.
DKNG Net Income (Quarterly) data by YCharts
That could present one significant opportunity for Disney's purchase of DraftKings. Disney owns one of the most popular sports brands globally with ESPN. It reaches hundreds of millions of sports fans monthly across its various channels, including TV, radio, website, the app, and streaming. Disney could use ESPN as an efficient way to market DraftKings. Just like that, one of DraftKings' significant hurdles to growth could be reduced.
As mentioned earlier, DraftKings must apply for licenses to access new state markets. That process could be helped by having the powerful backing of Walt Disney. States could feel more comfortable granting access to DraftKings, knowing Disney would raise quality standards and work diligently to protect its favorable brand image in consumers' eyes.
Does it make sense financially?
Here is where it becomes challenging for Disney. After the pandemic forced the closure of several of its lucrative cash-generating businesses, its balance sheet is not in the best shape. Disney has $13.3 billion in cash on hand with another $13.7 billion in accounts receivable. On the other side of the ledger, it has $29 billion in current liabilities and another $46 billion in long-term debt.
Even after DraftKings' 81% fall, it still boasts a market capitalization of $5.7 billion. Add in an almost certain premium Disney will have to pay, and it could approach a purchase price of $10 billion. Of course, Disney could use its stock to fund some or all of the deal, but it is uncertain if DraftKings will accept such an offer.
DKNG Market Cap data by YCharts
Such a deal appears unlikely, but it may become more than just speculation if DraftKings' stock continues to fall and Disney's financial condition improves. Nevertheless, investors should stay tuned, because the potential deal could mark a notable expansion in Disney's total addressable market.
