Flutter’s $4.2 Billion FanDuel Purchase Is A High-Cost U.S. Land Grab And It’s Worth Every Penny

Despite taking a discount on the company’s value, FanDuel gave its investors a reason to celebrate Thursday after announcing Flutter Entertainment had agreed to pay $4.175 billion to expand its stake in the sportsbook giant.

The deal, financed by a mix of cash and stock, buys out holding company’s Fastball’s 37.2% stake, bringing Flutter’s total from 57.8% to 95%. It is conditional on shareholder approval, but from their perspective, it could have been “much worse.”

When Flutter (previously named Paddy Power Betfair) bought into FanDuel in 2018, it did so at a valuation of around $559 million, according to Bullpen Capital Founder and Managing Director Paul Martino, an early investor in FanDuel. Even after a series of restructurings along the way, Flutter retained an open-ended call option to buy out the rest of the company. Given the massive success FanDuel has had in the years since, it was unclear how FanDuel’s valuation would be determined. For those who got in early, like Martino’s firm, it was a doomsday scenario.

“The fact that they had to acquire at near close to market value, I’m sure all of us early investors can breathe a bit of a sigh of relief as the result of that,” Martino says. “I think it’s probably a small discount…but $11.5 billion and $559 million is a pretty big difference.”

Even if Flutter had other avenues to save more on the transaction, it’s hard not to declare the company winners on all fronts. Flutter had previously agreed to buy out Fastball’s stake by 2023, a deal that could have put them on the hook for a lot more than FanDuel’s more than $11 billion valuation at this price. Martino says he heard FanDuel was valued as high as $14 billion right now. Instead, the company spent a little extra to fast-track its exposure to the fast-growing U.S. sports gambling market.

Since the Supreme Court declared the Professional and Amateur Sports Protection Act unconstitutional in May 2018, sports gambling has become fully operational in 19 states and Washington, D.C. The industry drew $13 billion from American bettors legally in 2019, according to the American Gaming Association. With six more states passing bills to legalize and two others with active bills on the floor of state legislatures, that number is poised to grow—and FanDuel along with it. 

“Sports betting is still relatively young as an industry, but we’ve managed to build a great leadership position being the first operator to go north of $1 billion of gross gaming revenue that we’re projected to do this year,” FanDuel CEO Matt King says. “And this transaction is really about accelerating Flutter’s investment in the U.S. market.”

Fanduel was initially founded in 2009, offering a daily variant of the traditional fantasy sports games available. Overcoming challenges to its legality, a failed merger with rival DraftKings and the Covid-19 pandemic, it has since grown to roughly $850 million in expected net revenue, 9.5 million customers, and 43% of market share in states where gambling is legal during Q3, according to today’s announcement.

It has significantly expanded its reach in the last few years, forming partnerships with FOX Bet, Turner Sports and multiple professional teams such as the Detroit Pistons and the New York Giants. According to data provided by FanDuel, its gross gaming revenue and market share is roughly 1.5 times and 1.7 times, respectively, greater than its closest competitor.

Those numbers do raise questions, considering FanDuel’s valuation is just over a fourth of DraftKings’ approximately $40.1 billion market capitalization. However, Martino says this is a factor of Flutter’s complex ownership structure, overseas operations and ultimate liquidity—making it difficult to “apples-to-apples-value them.”

Still, publicly-traded competitors DraftKings and Penn National Gaming have boomed this year, furthering the industry’s outlook as a whole. DraftKings’ stock is worth nearly five times its price year-to-date and Penn’s share price has almost tripled with an $11.16 billion market capitalization, according to MarketWatch.com. That doesn’t worry FanDuel.

“We don’t think this is a winner-take-all market,” King says. “It’s not like some [industries] that build business and can only have one winner.”

Though regulatory challenges remain with further legalization, King says the company sees it as opportunity. “The fact that you now have states who have been live for a couple years just makes it easier for new states to see, in living color, all the good things that happen when you do this,” he says.

FanDuel’s rollout in Michigan is currently live in retail, with online gaming coming in a few weeks. It plans to expand to Virginia in the first quarter of 2021. Flutter projects its potential gross gaming revenue, in the states it operates in, could be worth as much as $9.1 billion at maturity.

Now, with nearly half the deal financed in stock, early investors get to go for the ride. Martino says Flutter could see 400% to 500% returns over the next decade as states continue to legalize sports gambling. So even if Flutter sacrificed on price, it’s high-cost U.S. land-grab is worth every penny.

“These are gonna be behemoth companies that are gonna rival MGM and rival Caesars and rival LVS over the next decade,” Martino says. “The fact that these were little startup companies that started in fantasy sports, it’s amazing that they’re going to be topplers of some of the biggest casino companies in the U.S.”