FanDuel spin-off hopes send Flutter shares all-a-flutter

It seems somehow appropriate during the week of the Cheltenham Festival that shares of the owners of the UK’s best-known names in betting have taken off.

But Monday’s rise in shares of Flutter Entertainment, the owner of Paddy Power and Betfair, and Entain, the owner of Ladbrokes and Coral, have nothing to do with events at Prestbury Park.

Rather, they reflect corporate developments at the former, a giant whose other gaming brands include Poker Stars, Sky Bet and Oddschecker.

The asset that has got Flutter’s investors all-of-a-flutter, though, is the one perhaps least-known in the UK – FanDuel.

Flutter’s shares rose by almost 10% at one point this morning after it confirmed a CNBC story that it is considering hiving off FanDuel as a separate company.

Founded in 2009 as a fantasy sports company, FanDuel has emerged to be America’s largest online sports betting business, accounting for around 40% of the market.

Yet shareholders in Flutter have become frustrated that the stock market has failed to value this strong market position appropriately.

FanDuel’s closest rival, DraftKings, has a stock market value of $28bn.

Flutter, prior to today’s jump in the share price, was valued at £27.7bn ($38.5bn).

That is not much of a difference in view of the fact that Flutter also owns a multitude of other well-known and profitable betting brands and, more significantly as far as investors are concerned, FanDuel is a significantly bigger business than DraftKings.

FanDuel’s revenues in 2020 were $967m while DraftKings enjoyed revenues of $644m.

Peter Jackson, Flutter’s chief executive, said at the company’s results earlier this month that FanDuel’s revenues were larger than the combined revenues of its two largest rivals, DraftKings and Penn National, a casino and racecourse operator.

Accordingly, some investors have been pressing Flutter to spin off FanDuel, noting that the latter on its own could enjoy a stock market valuation of as much as $38bn.

Flutter said today: “Options including the listing in the US of a small shareholding in FanDuel are being considered but no decision has been made at this time. Should a decision be made to proceed with a listing in due course, an announcement will be made as appropriate.”

The temptation must be great. DraftKings last year made one of the most successful stock market debuts seen in the US. It came to market in April via a merger with a so-called Special Purpose Acquisition Company (SPAC) or ‘blank cheque company’ called Diamond Eagle Acquisition Corp, which listed in 2019 at $10 a share.

Those shares closed on Friday evening at an all-time high of $71.75 each.

What has really excited investors is that this market is only just getting going. Apart from in the state of Nevada, sports betting in the United States was effectively illegal until 2018, when the US Supreme Court ruled that it was down to individual states to decide whether or not they wish to permit the practice.

FanDuel is now offering online sports betting in 10 US states, the latest being Virginia and Michigan, with votes to legalise the practice in other major states, including New York, Texas, North Carolina and Montana, due later this year.

Flutter said this month that it now expects the “total addressable market” in the US to be worth more than $20bn by 2025.

However, Mr Jackson was circumspect when he was asked directly by an analyst this month whether a flotation of FanDuel was on the cards, sidestepping the question.

He told James Wheatcroft of the investment bank Jefferies: “The scale and scope of our US business is very impressive. We believe we have the premium asset in the US market and we’re very proud of that.

“We’ve worked hard over the last few years to build out that capability and we are number one in America – there’s not many British businesses that can state that.”

Yet spinning off FanDuel would not be straightforward.

This is chiefly because while Flutter owns 95% of FanDuel, having paid $4.2bn in December last year to raise its stake from 57.8%, it has an agreement with Fox Corporation, the media giant chaired by Rupert Murdoch, under which the latter has the right to acquire an 18.6% stake in the business from June this year. That option lasts for 10 years.

The agreement dates back to Flutter’s $12.3bn merger in May last year with Stars Group, the Canadian gaming firm, which had a 25-year licence with Fox to use the Fox Bet brand name.

Fox is also one of the 10 biggest shareholders in Flutter itself, owning a 2.6% stake, with Lachlan Murdoch, the executive chairman and chief executive of Fox, telling investors last month that the company was enjoying its partnership with Flutter.

So that ownership issue will have to be ironed out prior to any demerger of FanDuel.

But Greg Johnson, analyst at broker Shore Capital, said Flutter would also have another calculation to make.

He told clients today: “A partial listing of US assets is a way of arbitraging the inherent value of such assets within broader gaming groups. The decision to be made is arguably of future funding requirements versus giving up a proportion of the upside.”

Either way, the news has helped remind investors of the value of Flutter’s stake in FanDuel, while reminding the market also of the potential for established UK gaming companies which, with decades of experience of operating in regulating markets, have plenty of expertise for US operators to tap.

William Hill has already agreed to a £2.9bn takeover by Caesar’s Entertainment, the Las Vegas-based casino operator while Entain in January turned down an $11bn approach from MGM Resorts, another Vegas casino operator.

It feels as if the consolidation in the sector over recent years is only set to continue.

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