· The Paddy Power owner is expanding its footprint in the fast-growing US gambling market
· But a new review of gambling regulations could spell trouble closer to home
As it looks to expand further into the burgeoning US market, Flutter Entertainment (FLTR) is set to increase its stake in fantasy sports betting company FanDuel to 95 per cent. Pending shareholder approval, it will spend $4.2bn (£3.1bn) to acquire the 37 per cent share held by a consortium of investors that includes private equity giant KKR. The deal will be funded through a combination of cash, shares and a £1.1bn placing.
The remaining 5 per cent of FanDuel will continue to be held by casino operator Boyd Gaming as part of a market access agreement struck in 2018. Flutter’s US media partner, Fox Sports, also has a 10-year option to purchase an 18.5 per cent stake in FanDuel that it can exercise from next year.
Fanduel is the leader in the US fantasy sports betting market, followed by DraftKings (US:DKNG), which has an enterprise value (EV) of around $20bn. Flutter’s deal implies an EV of $11.2bn for FanDuel and, as such, Deutsche Bank analyst Simon Davies believes this is a “compelling price for a transaction which provides certainty and consolidates control of what is significantly Flutter's most valuable asset”.
The US is fertile ground for gambling companies after the Supreme Court overturned a federal ban on sports betting in 2018. Around half of the 50 states have legalised sports wagers so far and more are likely to follow. Flutter estimates that for every 5 per cent of the US population that is given access to regulated sports betting, its addressable market increases by $850m.
Flutter saw its revenue from across the pond surge by more than 80 per cent year on year in the three months to 30 September, to £161m, as FanDuel doubled its number of active sportsbook customers. Further momentum should come from FanDuel’s new five-and-a-half-year deal with Turner Sports to provide betting insights for the National Basketball Association (NBA). However, as Flutter continues to invest in growth, its US business remains lossmaking, with cash losses guided to be up to £180m this year.
Closer to home, there is the threat of additional regulation to curb the harm caused by the gambling industry. The government has launched a “wide-ranging” review of the UK’s 2005 Gambling Act that will consider introducing stake limits and restrictions on advertising, such as sports team sponsorship. This would build on tougher measures introduced over the past couple of years, including banning the use of credit cards for gambling and cutting the maximum stake on fixed-odds betting terminals. Aside from Flutter, more stringent regulation would also impact rivals GVC (GVC), 888 Holdings (888) and William Hill (WMH), the latter of which is due to be de-listed after being snapped up by Caesars Entertainment.
Flutter’s shares shot up following the announcement of the FanDuel acquisition, although the prospect of further regulatory hurdles did take some of the wind out of the group’s sails. Still, the shares are still up almost 60 per cent so far this year, leaving them trading at 37 times consensus 2021 earnings. Even accounting for the considerable US opportunity, that looks like an expensive bet. Hold at 14,670p.
Last IC View: Hold, 12,740p, 27 Aug 2020