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The Flutter/Stars tie-up brings huge benefits for the gambling business
Thursday 02 Jul 2020 Author: Martin Gamble

We believe the pandemic-induced shift towards online gambling and acceleration in the opening up of US states puts Flutter Entertainment (FLTR) in the box seat, stealing a march on the competition and underpinning growth.

Flutter, which owns Betfair and Paddy Power, agreed an all share tie-up with Canadian sports betting company Stars Group in October 2019 to create the world’s largest online business-to-consumer betting company with forecast revenues expected to exceed £4 billion this year, according to data compiled by Refinitiv.

The combined group has a better balance of sports and gaming revenues and a larger global reach, increasing diversification and growth opportunities.

The pandemic-induced lockdown has accelerated the shift towards online, as highlighted by first quarter results to 31 March which showed a 200% increase in US gaming revenues, which offset the 46% fall in sports revenues.

In addition to the online tailwind, pressure on public finances resulting from COVID-19 will increase the pace of US states opening to online sports betting and ultimately gaming, according to management.

For example, California could raise around $400 million a year in taxes assuming a 15% tax rate, helping to ‘cut through’ some of the political obstacles. Using the UK spending per head as a proxy for US spending suggests gross revenues of $19 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) topping $5 billion in sports betting by 2023.

While only Jersey, Delaware and Pennsylvania currently permit online casino and poker, with Nevada online poker only, investment bank Jefferies expects around 20 states to pass the necessary legislation by 2023 out of 44 possible.

The onset of the pandemic forced all gambling firms to cut non-essential expenses and raise new money to tide them over during lockdown and strengthen finances. Flutter successfully raised £812 million of fresh capital on 29 May which reduced the ratio of net debt-to-EBITDA by 0.9 times towards its one-to-two times target.

Arguably Flutter wouldn’t have moved so quickly to deleverage without the impetus provided by the pandemic.

Importantly the company now has extra firepower to access further deals and enhance competitive positioning. Some of the money will be used to retain poker and casino customers it gained through lockdown.

Analysts don’t expect a dividend for the 2020 financial year, but the cash reward should resume in 2021, albeit most likely at a lower level. Jefferies forecasts 134p in 2021 and 200p in 2022, the latter putting the dividend back at the level paid for the 2019 financial year.

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