Can Flutter find friends again in Fox to deliver on US online gambling promise?

Lachlan Murdoch, the elder son and heir-apparent of media mogul Rupert, was effusive last December as the family's Fox Corporation backed a £1.1 billion (€1.28 billion) share sale by Flutter Entertainment, parent of Paddy Power Betfair, to tighten its grip on US fantasy sports website FanDuel.

FanDuel, now 95 per cent owned by Flutter, has emerged in recent years as the clear leader in the rapidly growing US sports betting market. Flutter's chief executive, Peter Jackson, pounced to take an initial stake in the business in 2018, immediately after the US supreme court struck down a federal law banning sports gambling.

“Fox’s investment in Flutter underscores our confidence in Flutter’s business and its management’s ability to continue to drive leadership in the US market,” Murdoch said, describing Flutter, in which it owns a stake of about 2 per cent, as a “partner”.

Valuation

The bonhomie didn't last long. Four months later, the Murdochs launched a legal action against Flutter over the price at which Fox has an option to acquire an 18.6 per cent stake in FanDuel from the Irish group. (The 2 per cent Flutter stake and FanDuel option resulted from Flutter's merger early last year with Canadian rival The Stars Group (TSG), which had a fledgling sports wagering joint venture with the Murdochs, called Fox Bet).

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Fox says that it is entitled to exercise the FanDuel option this month to buy the stake along the valuation lines at which Flutter bought its final 37.2 per cent in December from Fastball, a venture owned by a group of private equity firms.

Jackson argues that the Murdochs must pay the “fair market value” of the stake, which must be established by at least two investment banks, in July 2021.

What that is, is debatable. The Fastball deal put a £8.4 billion valuation on FanDuel, or 5.7 times the company's estimated sales for next year, Bank of America analysts said in a report on Flutter this week. Buying in on that basis would cost Fox £1.56 billion.

Looking at Flutter’s current share price and stripping out global assets outside the US, including Paddy Power, Sky Bet and Betfair in Ireland and the UK to Sportsbet in Australia, the market seems to be putting a valuation multiple of 6.3 times on FanDuel , according to the analysis.

However, valuing FanDuel in line with the ratio of 12 time sales at which its closest – but smaller – publicly quoted rival, Draftkings, is currently trading would set the Murdochs back just over £3 billion.

Arbitration

The standoff has gone into arbitration, overseen by a New York judge. This could take up until well into the second half of next year, according to reports.

Flutter flagged in March that it was considering an initial public offering (IPO) of FanDuel, taking advantage not only of the traditional premium at which US-listed companies trade compared to European shares, but also of how hot this sector had become.

However, there is little prospect of investment banks underwriting an IPO as long as the impasse continues – even though sources say that the Fox option relates to the operating business of FanDuel, which would be a subsidiary of a listed entity.

Even if the valuation of the option is resolved, potential investors in FanDuel will rightly question whether their interests will always be aligned with the Murdochs.

There are suggestions in some quarters that the real prize the Murdochs are seeking to extract is to push through a merger between FanDuel and Fox Bet, a venture where Fox Corporation also holds options. But this business is beginning to look like an also-ran.

The problem is, Jackson isn’t a fan, telling analysts conference call in March “struggles” Flutter is having with the “quality” of Fox Bet product.

“[It’s] something which is definitely hampering the ability for that business to get the traction it needs,” he said.

“And it’s a really good reminder for us of what it’s like to be one of the subscale operators in America and... because we sometimes forget the difficulties they face when we look at the fantastic results that the FanDuel business is delivering as the number one player there in that market.”

FanDuel accounted for almost 92 per cent of the group’s US revenue in the first quarter of this year, making it the dominant force behind Flutter’s 40 per cent stake of the country’s sports betting market.

Market

And that market is only getting bigger. Analysts at Jefferies this week estimated that the total addressable North American market for online sports betting and internet gambling is heading towards $38.7 billion, fuelled as US states are legalising online betting at a faster-than-expected rate.

Flutter must partially float FanDuel for the value of the opportunity to be properly reflected in its own share price. But potential investors will need assurances that Flutter and the Murdochs can work as proper partners after the option value issue is resolved.

In the meantime, there's the small matters of finding a new chief executive for FanDuel, after Matt King handed in his notice last month after four years.

Flutter will also need to work out whether the 30 per cent share price slide by Draftkings since March are company specific – or a sign that some of the froth is coming off the sector.