US Spinoff Expected After Flutter Ups Its FanDuel Ownership

The likelihood of an IPO for Flutter’s US interests increased yesterday after the company announced it had upped its ownership of FanDuel in a deal worth $4.18 billion.

The accelerated acquisition process will see erstwhile FanDuel owners Fastball cash in their 37% stake in FanDuel.

The deal is significant in that, as Jefferies analyst James Wheatcroft told clients yesterday, it “clears up the uncertainty that has overhung the shares.”

Flutter doesn’t own all of FanDuel – Boyd Gaming has a 5% stake. The only other complication comes with media giant Fox, which currently has a 2.6% stake in Flutter and, according to the terms of yesterday’s deal, will have an option to buy a further 18.5% stake in FanDuel in July next year.

The $11 Billion-Plus Question

By cleaning up Fastball’s interest, Flutter clears the way to more clearly value the company’s US interests as a separate entity with clearly defined ownership.

The price of $4.2 billion for the Fastball stake of FanDuel values that business at $11.2 billion, which the acquisition announcement release makes clear, is a significant discount to the current value of nearest rival DraftKings.

Moreover, the FanDuel business has a broader product and brand footprint than DraftKings, encompassing not only sports-betting, online gaming, and DFS but also FOXBet (and the FOXBet Super Six free-to-play game) and the TVG horse racing betting business.

As of Friday, DraftKings was valued at around $19.6bn.

That raises the question, why Fastball accepted an exit price at such a significant discount. All that Peter Jackson, CEO at Flutter, said on the call was that Fastball wanted to “avoid being the minority shareholder in an illiquid asset.”

In other words, someone had to budge to make FanDuel less illiquid, and Fastball clearly opted to take the money now.

To finance the deal, Flutter will contribute $2.1 billion of current cash resources. It has also already completed an equity raise, which has brought in £1.1 billion ($1.46 billion) of new shareholder cash.

Succession Planning

As a minority shareholder in Flutter, Fox Corporation has proportionally taken up its allotment of new shares.

But those who have watched Succession will have noted the nuance that Jackson said, ‘the first person he called about the deal was Lachlan Murdoch at Fox Corporation.’

“Fox are very important partners,” Jackson told analysts. “They were the first people we rang about this deal. We’re delighted they are participating in our placing.”

These comments raised the intrigue level over the plan to sell a further 18.5% of FanDuel to Fox next summer. One analyst suggested it was merely because Fox wouldn’t have wanted to “cough up that much now.”

And the early call? “The Murdoch’s need careful managing to get a tune out of them – it would be silly for (Lachlan) not to have been the first call?”

Fox Corporation’s long-term plans regarding sports betting in the US are unknown. Its holding-pattern quote about FOX’s audiences being “highly-engaged with free-to-play and wagering content” told us nothing new of substance.

Neither, in truth, did the analyst call. The presentation discussed the total addressable market (TAM) continuing to grow and suggested that each incremental addition of 5% of the population added circa $850 million for sports betting and $1.3 billion for online gaming.

Flutter also noted that the brands New Jersey gambling sites would now be contributing $40 million to the company in 2020 and that these profits would be plowed into funding investment in additional states.

Sunlit Uplands

Jackson said the point of highlighting that New Jersey was now returning a profit was to say that “what we thought was going to happen (in the US) will actually happen.”

“We will get through this J-curve point,” he added.

Such a “clear pathway to future growth and profitability” will be at the core of any float proposition down the line.

“We have always controlled the FanDuel business since we acquired it,” Jackson said.

“We have been pretty aggressive in the market since it started. We are determined to build a business to real scale. We are not going to change that posture. We will build a leading business in the US.”

There can be no doubt that the building blocks are indeed now in place. But whether Flutter will get to helm the business long-term is less certain.

The equity markets’ excitement over US sports-betting and online gaming this year has been all too evident, from the DraftKings float to the rash of gaming-related Special Purpose Acquisition Companies.

By making its move on FanDuel, Flutter will be well aware that it contributes to the sense of unstoppable momentum and makes it all the more likely its shareholders will be seeing their U.S.-related liquidity event sooner rather than later.