Industry reaction: Flutter fixes FanDuel price as FOX prepares for second round of arbitration

Long-time US partners Flutter Entertainment and FOX hit the headlines earlier this week when a New York arbitrator working for the Judicial Arbitration and Mediation Services (JAMS) confirmed the purchase price of a pre-agreed 18.6% stake in FanDuel.

The dispute centred on whether FOX could purchase the stake at a valuation price as of December 2020, when Flutter bought a 37.2% stake in FanDuel from Fastball Holdings, or whether it would have to buy the stake at July 2021’s prices, as previously agreed.

FanDuel’s rise from a lowly daily fantasy sports (DFS) operator to the top US sportsbook has been a meteoric one, and the $9bn gulf between FanDuel’s December 2020 valuation and its JAMS-approved valuation of $20bn meant the stakes were high. In the wake of the ruling, analysts gave their verdict on the future of both businesses’ partnership.

Peel Hunt’s Ivor Jones:

On Friday Flutter announced that it had won the arbitration in relation to FOX’s option over an 18.6% stake in FanDuel, implying a US$22bn value for FanDuel (increasing 5% annually). Our sum-of-the-parts valuation of Flutter includes FanDuel at US$19bn, so this ruling removes the risk of value leakage to FOX, in our view.

We expect Wednesday’s trading update to highlight a continuing remarkably strong performance from FanDuel, the potential upside for recently acquired Sisal in Italy and the return to year-on-year (YoY) growth in 4Q22. We reiterate our Buy recommendation and 16,000p target price.

Flutter’s view has prevailed, that the FOX option exercise price should be based on fair market value for FanDuel on December 3, 2020, deemed to be US$20bn (not the US$11bn to which we believe FOX aspired). The value compounds at 5% per annum from that date and FOX has until 2030 to exercise, on condition that it is appropriately licensed.

As a separate issue, it was held that FOX has until August 2023 to exercise its right to acquire 50% of TSG US (FoxBet, PokerStars US and Super6), again, only if FOX is licensed. Otherwise, the agreement can be terminated and PokerStars US and Super 6 would remain with Flutter. FOX’s press release sounded more pleased than we had expected.

Morgan Stanley’s Benjamin Swinburne:

We see the arbitration judgement as a net positive, with fair value for the FanDuel option assured, and a pathway open to a resolution of the TSG US assets without a protracted negotiation. The judgement has confirmed FOX’s 10-year option timeline, but any potential price is now known (and close to Morgan Stanley equity’s fair value rather than a ~50% discount).

We see the supplemental judgement around the future of FOX Bet/TSG US as positive. First, Flutter will not have to increase the resources for the operation of FOX Bet (3% of revenues, 20% of EBITDA losses in H1) beyond current levels.

Second, either party can terminate the agreement in August 2023 if FOX does not take up its 50% option by this time, with FOX Bet residing with FOX and PokerStars and Super 6 being retained in Flutter.  We see as a positive this possible pathway to gain further strategic clarity and optionality for igaming/poker without the need for potentially protracted negotiations.

Barclays Capital’s James Rowland Clark:

Arbitration values FanDuel at $20bn as of December 2020, highlighting the long-term value opportunity to Flutter and removing the downside risk of an arbitrated “Fastball” valuation. However, under present market conditions, an IPO lacks visibility and there is no exercise of the option by FOX to crystallize value. Hence, we think little has changed.

There are however reasons for positivity:

1) Long-term valuation upside – the implied FanDuel value today of $22bn based on the arbitration compares to ~£11bn in our SOTP [sum of the parts valuation] which drives our £110 PT [price target]. If we assume $22bn for FanDuel in our SOTP (£91 per share), our PT would equate to £155 (35% upside to today’s share price, all else equal).

2) Downside risk on cost of option removed – the ruling locks in a “fair” market value removing the risk that FOX could pay a value based on the Fastball Holdings buy out.

3) No overhang – the arbitration uncertainty is removed and management can move forward with US execution without distraction.

Davy’s Michael Mitchell:

This was a protracted process but it has concluded with a highly satisfactory outcome. The binding arbitration ruling means Flutter Entertainment has successfully protected shareholder value – if it must give up a stake in FanDuel, it will now be doing so based on a December 2020 fair market valuation of $20bn (the determined value also creating a strong foundation for the business’ current valuation). Other resolutions have also created a more certain pathway and timeline to optimize shape and ownership structure for its broader set of US businesses, including PokerStars, Super 6 and FOX Bet. Finally, the arbitrator is expected to rule by early 2023 on whether FOX Corporation (FOX) can participate in any FanDuel IPO and, if so, under what conditions.

It remains to be seen whether FOX will choose to exercise the option. In addition to onerous licensing requirements, it would in effect be acquiring a stake in a private company below FanDuel parent company level. In December 2020, Fastball Holdings was willing to dispose of the same stake at an almost 50% discount to fair value, reflecting its preference for price certainty and an accelerated exit of its full stake, but also highlighting the unclear liquidity position of its holding at the time. Crystallizing value in any investment may prove equally challenging for FOX.