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The transaction simplifies the group’s stakeholder position in the US, increasing control
Thursday 10 Dec 2020 Author: Martin Gamble

Paddy Power Betfair owner Flutter Entertainment (FLTR) has taken a big strategic step by increasing its stake in US fantasy sports betting market leader FanDuel to 95% from 57.8%, in a £3.1 billion cash and shares deal. FanDuel’s market access partner Boyd will hold the remaining 5% stake.

Flutter’s US operations are still loss-making despite being expected to generate more than $1 billion of gross gaming revenues in 2020, up over 70% year-on-year, according to company estimates.

Owning a greater economic interest in FanDuel will increase the company’s share of FanDuel’s losses in the short-term.

Post the transaction Flutter expects net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) to be below three times.

Gambling consultancy Regulus Partners believes the cash generative nature of Flutter’s business means it won’t have a problem supporting the debt, but it will increase the pressure on the core business to perform in a difficult economic and regulatory environment.

The US operations have been building strong momentum this year as seen from the 82% increase in third-quarter revenues to £161 million.

By the end of 2021 Flutter expects to be live in US states generating $9.1 billion of gross gaming revenues at maturity, equivalent to the size of the UK, Ireland and Australian markets combined. For reference these regulated markets are expected to earn Flutter over $1 billion of EBITDA in 2020.

FanDuel is the market leader in fantasy sports with over 9.5 million customers and enjoys a structural cost advantage over most competitors when it comes to customer acquisition costs.

Despite a leading market position and growth potential, Flutter’s transaction to increase its stake values FanDuel at $11.2 billion compared with Nasdaq listed DraftKings’ $21 billion.

Management said the ability to buy the stake at below fair market value discount reflected several factors including the seller’s minority position in FanDuel and the provision of price certainty and liquidity.

Jefferies’ analysts noted that putting FanDuel on a similar valuation to DraftKings equated to a value of greater than £180 for Flutter. Its shares traded at £148 at the time of writing.

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