A FLUTTER WORTH HAVING?

Gambling deal has much to prove,

FLUTTER, formerly Paddy Power Betfair, is betting the farm on the acquisition of The Stars Group (TSG), a Canadian gaming company with a mixed track record. Flutter, which will continue to operate out of Dublin, is combining with Toronto-based TSG, in an all-share deal which will give shareholders of the Irish company 54.6pc of the enlarged group. Most of the top jobs are also going to the Flutter side, with chairman Gary McGann, chief executive Peter Jackson and finance chief Jonathan Hill all getting to keep their jobs. Flutter will also provide five of the eight non-executive directors of the merged company.

Investors liked the deal, with the Flutter share price, which had been trading at just over €85 before the announcement, leaping by over 20pc, to €103. Although the shares later fell back, they were still trading at €92 at the end of the week.

At the pre-announcement share price, Flutter is paying the equivalent of just under €6bn for the firm. The price tag rises to almost €6.5bn at a €92 share price. With TSG shareholders set to receive 0.2253 Flutter shares for every TSG share they currently own, that translates into the equivalent of somewhere between €19.15 and €20.72 per TSG share.

So what is Flutter getting in return for all of these new shares? TSG has seven million customers, annual revenues (including acquisitions) of £1.9bn (€2.1bn) and ebitda (earnings before interest, taxation, depreciation and amortisation — also including acquisitions) of £689m.

When combined with the existing Flutter, the merged group will have 13 million customers, revenues of £3.7bn and ebitda of £1.14bn.

The global betting market is worth about $450bn (€410bn) annually. About 11pc, $50bn, of this is wagered online. Most of the growth in gambling is taking place online, with annual growth there running at 11pc a year.

However, despite this strong growth, the biggest gambling market of them all remained tantalisingly out of reach, with off-course sports betting being banned in 46 of the 50 states of the United States.

That all changed in May of last year, when the Supreme Court struck down the ban and opened the way for Flutter to enter the American sports betting market, which has been variously estimated to be worth from $67bn to $150bn a year.

Within two days of the Supreme Court ruling, Flutter had already made its first foray into the American market, when it announced that it was in discussions to acquire a stake in US fantasy betting company FanDuel. In July 2018, Flutter acquired 61pc of FanDuel, with the option to increase the shareholding to 100pc by 2023.

The TSG deal turbo-charges Flutter’s assault on the US market. In addition to FanDuel, it now acquires TSG’s effective 50pc stake in Fox Bet, a joint venture with Fox Sports. The first two Fox Bet products will launch this autumn.

“The combination brings together strong brands with outstanding distribution and market access, which will ensure a winning combination in the United States,” said Jackson.

The Fox Bet deal was the latest in a series of transactions from TSG over the past five years. The first of these was the $4.9bn acquisition of PokerStars in 2014, a deal that transformed TSG into the world’s largest online poker company.

Then, in February 2018, it agreed to pay $117m for 62pc of Australian sports betting company CrownBet. A month later, it increased its CrownBet shareholding to 80pc, and CrownBet acquired William Hill’s Australian operations, in a deal valued at $315m.

It followed this up in April 2018 with an agreement to pay Sky (Fox’s sister company) and venture capitalist CVC Capital $4.7bn for Sky Betting & Gaming.

However, despite TSG having spent more than $10bn (€9.1bn) on acquisitions since 2014, Flutter is buying the whole company for somewhere between €6bn ($6.6bn) and €6.5bn ($7.15bn). This would imply that TSG massively overpaid for these acquisitions.

That is certainly what the TSG share price, which before the Flutter announcement was trading at just 40pc of its June 2018 peak, seems to be saying.

Will Fox Bet prove to be similarly destructive of shareholder value? TSG, which was originally called Amaya, has had a colourful history. The insider trading case against former chief executive David Baazov collapsed in June 2018. The prosecution alleged that Baazov, who is no longer involved with TSG, had sought to manipulate the share price during the PokerStars takeover.

Will Flutter make the same apparent mistake as TSG and end up overpaying for its “groundbreaking” acquisition? The jury is still out on that one. While it is still far too early to pass judgement on Fox Bet, Sky Betting & Gaming does seem to be delivering the goods, with TSG chief executive Rafi Ashkenazi speaking of its “record performance” at the publication of halfyear results in August.

Flutter reckons that the TSG deal will generate annual savings of £180m by the third year and that these savings will cost it £180m to achieve.

As he integrates the two companies, top of Jackson’s to-do list will be putting the relationship with the minority shareholders in FanDuel and Fox Bet on a more permanent basis.

In order to get the deal over the line, Flutter agreed to sweeten the pot for the minority shareholders. Fox Sports is to get an option to buy 18.5pc of FanDuel, while the FanDuel minority shareholders will receive a payment equal to 12.5pc of the increase in the value of Fox Bet between the completion of the deal and July 2023.

Jackson described these side-deals as “aligning the economic interests of our partners on both sides”. This process almost certainly has further to go.

“All of the stakeholders have committed to discuss options for further alignment prior to the completion of the transaction [something that is scheduled to happen in the second half of 2020],” he said.

If Jackson and his team get it right, Flutter stands to benefit massively from the opening up of the giant US sports betting market.

Get it wrong though and Flutter, like TSG, could find itself on the receiving end of a low-ball bid from a competitor.

The TSG agreement turbo-charges Flutter’s assault on the US market