Flutter bets Covid-19 will ease puritan take on gambling in US

Peter Jackson, chief executive of Paddy Power owner, Flutter Entertainment, is preparing to double down again in the US – with the help of Fox and friends.

The Yorkshire native made his first decisive move on the new frontier of online gambling in May 2018, announcing a deal to take a majority stake in New York-based fantasy sports site FanDuel within days of the US supreme court striking down a federal law against sports betting.

It was an audacious step for a man just months in the job at the time, who was otherwise trying to settle a bruised group formed two years’ earlier through the tie-up of Paddy Power and Betfair but that had failed to live up to the hype – and was increasingly the target of regulators and taxmen in its traditional markets.

Earlier this month, Jackson completed his biggest wager yet, merging the group (which change its name in 2019 to Flutter) with Canadian rival The Stars Group (TSG), creating the world’s largest online betting company with a market value of almost €17 billion.

Rival

In doing so, Jackson snapped up an acquisitive rival that had parked its tank on more than one occasion on Jackson’s turf. TSG had acquired a controlling stake in a rival of Flutter’s Sportsbet arm in Australian in early 2018, followed, within months, by its $4.7 billion (€4.2 billion) purchase of Sky Bet in the UK, Paddy Power’s biggest market.

The TSG deal also took out a likely adversary in the US market. The Canadian group had formed a potentially powerful media and sports wagering joint venture in the US last year, called Fox Bet, with a unit of the Murdoch family’s Fox Corporation.

Horse trading around the Flutter-TSG marriage resulted in Fox securing the right to buy an 18.5 per cent stake in FanDuel from 2021. Fox Corporation also ended up with an almost 2.3 per cent stake in the combined group, as its previous 4.99 per cent interest in TSG was diluted in the all-stock deal.

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While Flutter shares lost almost 40 per cent of their value in Dublin in the first half of March as sporting fixtures succumbed to the Covid-19 crisis, trading statements from both the company and TSG before the deal was consummated showed that the logic of the tie-up was stronger than ever.

Although Flutter warned of a “significant impact” on its business, as it saw sports betting in the key UK and Ireland markets fall off a cliff from mid-March amid sporting event cancellations, widespread lockdowns has sent TSG’s online poker and casino revenues soaring.

Shares

Flutter shares have surged by more than 90 per cent over the past 2½ months, leaving them ahead of the year as wider western equity markets wallow in the red.

The risk for Flutter, however, was that TSG’s high debt load heading into the merger had brought new risks to a traditionally very solid balance sheet at just about the worst possible time. Flutter’s decision in late March to abandon its final 2019 cash dividend as well as a planned shareholder payout for the four months this year prior to the merger helped at the margins – saving an estimated €150 million.

But Flutter’s move on Thursday to launch a €900 million share sale will push down the new group’s debt level, which was in the region of 3.5 times earnings before interest, tax, depreciation and amortisation (Ebitda). The group expects the burden to fall by 0.9 times ebitda by the end of this year, based on proceeds from the share placing and the market consensus that its full-year earnings will amount to €950 million.

But the real upshot is that Jackson now feels he has the financial flexibility take advantage of an opportunity in the US as individual states, strapped for cash as a result of the coronavirus crisis, are expected to speed up the regulation of online gambling.

“Flutter believes that one potential consequence of the Covid pandemic is that the pace of regulation in the US could accelerate, as an increasing number of US states look for new ways to raise additional sources of tax income,” the company said.

Jackson’s betting, as it were, that a few state budget crises will shake off some remaining vestiges of puritanism in the US when it comes to gambling.

He’s not alone. Fox committed to increasing its stake as part of the share placing, with executive chairman and CEO Lachlan Murdoch saying it is “bullish about the opportunities in the digital sports wagering market” and Flutter’s “ability to continue to drive leadership in the US market”.

Deal

An investor presentation marketing the share sale showed that Flutter expects that the market for its products in the US to double over the medium term to more than $10 billion.

Analysts at Goodbody Stockbrokers are fans of the opportunistic share deal, high demand for which resulted in it taking place at less than a 5 per cent discount to Thursday’s closing price.

“While we did not believe the group needed to raise funds, it has left them with a stronger balance sheet and scope to increase investment, particularly in US should more states open up sports and gaming,” they said in a note to clients on Friday

Behind the scenes, Goodbody must be steaming, having being dumped earlier this year as Flutter’s joint corporate broker – after two decades. It replacement, arch rival Davy, will share an estimated €9 million in fees with fellow Flutter broker, Goldman Sachs, for managing the sale.

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