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Flutter Entertainment reaches for the Stars
5th October, 05:05Flutter Entertainment's reach for the Stars could turn the Irish group into the world's biggest betting business. The plan to merge with Toronto-listed Stars Group, owner of Poker Stars, Full Tilt and Sky Bet, and a partner of US media giant Fox Corporation, was announced this week.
Flutter is already big. It owns Paddy Power in the Republic, Sportsbet in Australia and FanDuel in the US, along with other smaller businesses. It has six million customers on three continents. On Tuesday night, before it announced details of the proposed merger, its closing price of €85.62 per share put the Dublin-headquartered group's total value at €6.7 billion.
Merging with Stars will add four million more customers; bring a series of complementary businesses under one roof in its key markets, while adding others that give it leading positions in Germany, Italy and Spain.
If shareholders and regulators approve the deal, some calculate the enlarged business will be worth €11 billion.
Investors will ultimately decide its post-merger value. Nevertheless, should the deal go through, Flutter would be comfortably ahead of rivals such as Coral-Ladbroke parent GVC, which is worth about €5 billion, and William Hill, whose price tag is about €2 billion.
Flutter should also nose ahead of Bet365, the privately-held British group thought by many to be the Irish player's nearest rival in terms of size. Valuing Bet365 is difficult as its shares are not listed. However, the company, which is based in Stoke on Trent, earned revenue of €3.2 billion in the 12 months to the end of March 2018. Flutter-Stars would have hit €4.3 billion last year had they been combined.
Size is everything in online betting. Millions of people around the world can potentially bet against the odds you offer on a horse race or football game. Recruiting them does not require opening chains of bookie shop or casinos, or buying racecourse betting pitches: it simply requires that your technology and marketing are right.
So the cost of offering those odds and reaching those people remains the same. Earnings multiply as client numbers grow, giving the business muscle to recruit yet more customers.
Peter Jackson, Flutter's chief executive, believes there are a lot potential customers out there. He calculates that gamblers around the world wager about $450 billion a year, but "only 11 per cent of that is online".
One feature of the Flutter-Stars merger is the savings of close to €160 million that it is expected the combined group will deliver. Jackson indicates some of that money will come from integrating those parts of the businesses that provide those odds, manage risk and deliver back-office support.
Michael Mitchell, an analyst with Davy Stockbrokers, agrees that scale is important. He notes that Flutter-Stars will encompass markets at different stages of development. The Irish and British markets are mature, characterised by slower growth and increased regulation - for example, the doubling of betting tax here this year to 2 per cent. The US, on the other hand, has just begun opening up to sports betting, following a federal supreme court ruling last year, offering huge potential for growth.
"Irrespective of where a market is, you want to have a dominant market brand, with a top two or three position. Then you have a level of global scale that you can leverage for further growth," he says. If the deal clears regulatory hurdles, that is exactly what Flutter-Stars will have.
In terms of the core businesses, the deal will add Sky Bet to Paddy Power and Betfair in Ireland and Britain, BetEasy to Sportsbet in Australia and Fox Bet to FanDuel in the US.
Poker Stars and Full Tilt Poker, which have market-leading positions in many countries, will join the stable as well. In all, the enlarged Irish group will have a presence in more than 100 nations.
Fox Bet is a joint venture between the US media giant Fox Corporation and the Stars Group. Like FanDuel, it has operations in New Jersey and Pennsylvania, two states that legalised sports betting quickly following the supreme court judgment, and has laid the ground for establishing itself in territories shortly expected to open up.
FanDuel is a sports fantasy business with a presence across the US that allows customers to compete with each other for cash prizes. Flutter's approach is to lure those clients into sports betting in states where it has been legalised. "Fox Bet will be able to pursue the same strategy, cross-selling from casino and gaming to sports," Jackson explains.
The group will follow this dual strategy across the US. Jackson maintains that it will be doing this from a position of strength. It already has the biggest share of sports betting in New Jersey, the first state to legalise. "We're very, very pleased with our market position the US," Jackson says. "The market seems to be opening up faster than we anticipated."
Mitchell notes that selling one form of betting to those interested in another is likely to be a feature of Flutter's strategy in many other countries as well. This will also grow the Stars Group element. One of the reasons the Canadian player moved into sports betting was that it had "a lot of poker", the analyst says, a business that is declining. Merging with Flutter opens a growing market to the company.
The deal will strengthen Flutter's hand in Australia, where its existing business, Sportsbet, is a leading online player. Adding BetEasy, Jackson predicts, will allow it take on the TAB, which enjoys a dominant position in that market thanks to the fact that it is rooted in a series of monopolies set up by the country's states to take bets on horse racing.
All this is a far cry from Flutter's roots, which lie in Paddy Power in the Republic and Betfair in the UK. The Irish element took its name from the traditional bookmaking business established in 1895 when Richard Power took a pitch at Tramore Racecourse in Co Waterford. The group formed when his grandson, also Richard, joined forces with Stewart Kenny and John Corcoran in 1988 to form a chain of 30 betting shops to combat an invasion of big British players such as Ladbrokes.
Paddy Power floated 12 years later, when it also launched its internet business. Around the same time, former stockbrokers Andrew Black and Edward Wray established Betfair in the UK. This was a betting exchange, different to traditional bookies, as it matched customers who wanted bet on a particular outcome at particular odds with others prepared offer those odds.
Its initial attraction was that it offered punters bigger winnings, but the flexibility that allowed customers to play both sides of a wager soon drew more sophisticated clients, who drove its growth. Paddy Power and Betfair had a lot in common: they were both established to disrupt something, both quickly grasped the internet's potential and both used clever marketing to lure customers.
By 2016, when they merged, each also had international businesses. Paddy Power had bought Sportsbet six years earlier, while Betfair had a presence in the US alongside several other countries. Last year's purchase of a majority stake in FanDuel, completed shortly after the supreme court ruling that paved the way for sports betting's legalisation, was the next big step change.
Mitchell sees little downside to the deal, but agrees that is has risks. One is that poker's growth appears to have run its course. The other, tied to that in some cases, is that Flutter will take on more unregulated markets than before. These are countries where it is not illegal to bet online, but which have no laws governing the practice either.
The Davy analyst estimates that this will account for 18 per cent of the enlarged group's business, against 5 per cent currently for Flutter. The risk is that the authorities will decide to ban or "switch off" digital betting. "It's not unusual for unregulated markets to switch off overnight," Mitchell says.
He believes that this is a possibility for poker in both Germany and Russia. However, Mitchell calculates that should this happen, it will have only a marginal impact on returns to the enlarged group.
Bloomberg columnist Chris Hughes highlighted Stars' €4.3 billion net debt in his analysis of the deal this week. Flutter has virtually no debt, so the total liability relative to enlarged group's earnings will fall sharply, potentially allowing it to refinance it at lower interest, as its increased cash flow will make repayment easier. Stars has also repaid about €500 million in recent months.
Shareholders and regulators must approve the deal. Flutter shareholders will get 54.64 per cent of the combined group while Stars Group investors will receive 45.36 per cent. The Canadian company's directors have already pledged the 23.7 per cent that they own.
To align interests, Fox Corporation, which owns 5 per cent of Stars and has the right to acquire 50 per cent of Fox Bet, will instead get the right to acquire 21.5 per cent of FanDuel in 2023. At the same time, Fastball and Boyd, which hold a minority stake in FanDuel, will receive 12.5 per cent of the increase in Fox Bet's market value in July 2023.
While it is a merger, Flutter is the "stronger" partner of the two. Jackson will be chief executive of the combined group, his colleague Jonathan Hill, chief financial officer, will take the same role in the bigger business, while the Irish company's chairman, Gary McGann, will head the board. Stars Group's executive chair, Divyesh Gadhia, will be McGann's deputy, while the Canadian group's chief executive, Rafi Ashkenazi, will be chief operations officer.
According to Hill, shareholders will vote on the proposed merger next March, around the time that Flutter reports its financial results for this year. At that point, the various regulators should be nearing the end of the first phase of their scrutiny of the deal.
Hill is optimistic that it will pass muster with merger watchdogs. "At this stage we are pretty confident that we going to receive the approvals at the appropriate time," he said this week. However, Hughes is not so sure. In his column he argued that it would face tough scrutiny from regulators, particularly in the UK and Australia. "Expect them to look at this one hard," he warned.
Ultimately, the only people who can answer that are the regulators themselves. In the meantime, a question Irish observers asked this week was whether a global €4-billion-a-year business would forget its roots in a Tramore racecourse bookie's pitch?
Jackson stressed that Flutter was an Irish company, domiciled in the Republic, and would remain so. "That is not going to change," he said.