The real deal: Has Paddy Power Betfair stolen a march on US sports betting rivals?

Paddy Power Betfair (PPB) and FanDuel started the expected bonanza of sports betting-focused M&A in May, with a landmark deal that will see the DFS operator folded into PPB’s US business. The London-listed firm will own 61% of the combined group, with FanDuel’s existing investors retaining a 39% stake. PPB will also throw $158m of cash into the mix, which will be used to pay down FanDuel’s debt ($76m) and fund the combined business’ operations.

The deal created the industry’s largest online gambling business in the US, with a customer base of some eight million players across DFS, horseracing betting, online casino and exchange betting. According to research firm Stifel, which valued the existing PPB US business at £300m, the deal values FanDuel at around £325m. This is some way below the $1bn valuation it once enjoyed, but it is perhaps a bargain considering its 1.3 million active customers, existing relationships with regulators, and the circa $400m spent on marketing by the company to date.

“While valuing loss-making assets can be more challenging, we believe that PPB is securing control of excellent strategic assets at a good price,” noted Irish analyst firm Davy. PPB will also have the option to gradually acquire the remainder of the JV over five years, using a mechanism that will independently value the business after 36 and 60 months.

“As such, PPB’s bet on the future pace of US market regulation is somewhat de-risked [assuming the valuations are fair],” Davy added. “In return, the group gains control of one of the most recognized sports brands in the US and a customer database made up almost entirely of want-to-be sports bettors.”

Crossover appeal

The overriding rationale for the deal was, of course, sports betting, with PPB CEO Peter Jackson saying: “The Group has leading sports betting operating capabilities globally and strong operations on the ground in the US. Together with our substantial financial firepower, we believe we are now well placed to target the prospective US sports betting opportunity.”

The exec’s words were given some credence in an analyst presentation from the two firms that claimed 84% of FanDuel customers already bet on sports – and were therefore prime targets for sports betting. The firms didn’t detail how they came to the numbers, but it helps answer one of the fundamental questions surrounding FanDuel and DraftKings’ role in the sports betting market – just how many DFS customers will switch over?

The answer, according to FanDuel at least, is a lot. Recent noises for DraftKings also suggested well over 50% of current users bet on sports. And it was a convincing business case for many analysts in the UK at least, with Jennings concluding: “[The deal] is close to a sure thing in terms of being able to identify high-yielding potential sports-betting customers.”

What a FanDuel/PPB sportsbook offering will look like at this stage is still somewhat unclear. Presumably, there will be a sportsbook tacked onto the FanDuel site, with the intention of being live before the NFL season starts – but will PPB also launch a standalone product under its existing brands? The prevailing wisdom is that it won’t, with the FanDuel brand offering much greater cut-through across the US than Betfair or Paddy Power.

Indeed, while FanDuel already boasts real-money customers in more than 40 states, a recent survey of 250 American consumers found none of them could name Paddy Power or Betfair unprompted as a gambling brand. In fact, insiders suggest PPB could use the FanDuel brand for online casino as well, despite the traction gained by the Betfair casino in New Jersey.

Davy analyst David Jennings told EGR: “I think the working assumption is that FanDuel will be the brand of choice for Paddy Power Betfair in the US, be it for sports betting or casino. TVG will remain synonymous with horse racing and we don’t see that changing but for everything else, we think it will be FanDuel. The brand was a huge driver behind the acquisition so using it everywhere makes sense”.

Online horseracing betting will continue to be covered by the TVG brand. Jennings also speculated the Betfair brand could be retained for the expansion of the exchange in the US. He added “I think the exchange will always be the Betfair brand, but their key focus in the short term will be sportsbook, not exchange. The latter really only thrives once the market becomes more sophisticated, and I think the scale of the sportsbook opportunity greatly exceeds the exchange in the near term.

“That said, we saw in Europe how first-mover advantage is key for exchange, so there’s little chance Betfair says ‘after you’ to competitors. PPB probably has the resources to do both. They seem to be moving fast in numerous US directions right now.”

[Subhead] Strings to the bow

The brand dilemma is almost a good problem to have, reflecting a diversified business which stands PPB in good stead for US expansion according to Barclays analyst Patrick Coffey. “We think PPB is well placed as the US market opens up because it has diversified exposure with four standalone businesses,” Coffey said. “It operates in 35 states via TVG, meaning it will likely be seen as a trusted partner; PPB’s exposure to DFS is important as we think DFS customers will likely be early adopters of legalized sports betting products; and PPB has a net cash balance sheet allowing it to acquire companies.”

FanDuel’s mobile-focus is also seen as a bonus, with novice US betting customers likely to favour simple, slick betting apps rather than complex desktop products. As Eilers & Krejcik noted: “PPB gets a fully-formed [albeit recently-slimmed] product team that has, as of late, been focused on cranking out fantasy variants designed to stretch the model and the audience. We think this is a particularly useful asset, especially if the US market moves quickly.”

Beyond product, reputation and brand image is one of the key reasons PPB chose FanDuel specifically, which scores very highly in consumer testing on trust and value. For B2B partners, it means both companies have a history of licensure which could appeal to land-based casinos looking for kosher sports betting partners, and it could also help attract customers looking for security in and potentially ‘shady’ industry.

As for FanDuel, it was likely not short of potential suitors following the Supreme Court decision, so could potentially have squeezed some more cash out of another buyer. But why did it plump for PPB? One reason, according to a source close to the deal, was that PPB’s existing investors – including NBC, Comcast and private equity house KKR – were unwilling to give up the golden ticket into the US betting market, having ridden out such a rollercoaster ride with FanDuel. By partnering with PPB, they were able to secure some cash up front, while also getting the ideal partner for the multibillion-dollar market.

These investors, along with PPB’s own massive cash reserves, gives the group “substantial firepower to invest in opportunities”, according to the two companies. The relationships held by the likes of Comcast, for example, could also provide PPB with a meaningful leg up in the sports betting landscape. Leveraging sports media to build brand and acquire customers was one of the core pillars of Sky Bet’s growth in the UK, for instance.

Beginning of the end for DFS?

As for the impact of the deal on DFS itself, it appears unlikely to be a positive for the industry. Jackson made it clear the acquisition was made with sports betting in mind rather than any desire to get into the salary-cap game. Likewise, Eilers & Krejcik Gaming says it is “generally bearish” on the long-term potential of DFS in its current form.

“Acquisition is expensive, churn rates are high, product velocity is relatively low, and there are a lot of indications that the salary-cap variant has already hit a ceiling in terms of addressable market,” the analyst said. “Major DFS sites are also still heavily dependent on a small cohort of players to generate a significant amount of total gross revenue. That all makes for a shaky foundation, and there’s nothing about the PPB acquisition that really changes the facts on the ground.”

The prospects for DRAFT, PPB’s snake draft DFS operation also remain unclear, with very little official mention of the start-up in any of the post-deal press. Eilers & Krejcik Gaming points out PPB may not want to run two unprofitable DFS business (both Draft and FanDuel were loss-making last year), although it may represent a useful acquisition channel. EGR NA understands PPB has considered discontinuing the DRAFT product, but is still evaluating options, particular how best to utilise the executive team, who were one of the key reasons for that acquisition last year.

Last man standing?

The FanDuel deal also prompts natural speculation as to the future of DraftKings, although a similar deal looks unlikely given DraftKings’ relatively strength (around 60% of DFS market share to FanDuel’s 40%) and major investments in sports betting so far, including expanded office space, and a New Jersey marketing campaign. Rumors circulated in early June that Swedish gambling giant Kindred Group was plotting to acquire DraftKings, but EGR NA understands the DFS firm has a much bigger price tag than FanDuel – close to the $1bn mark – and is confident enough in its preparations for sports betting that it will go it alone if no-one is willing to pay that kind of price.

Eilers & Krejcik Gaming said in a note: “FanDuel’s positioning for sale was clearly broadcast on a number of levels: significant job cuts, surrendering market share, elevating a CEO who was well-equipped to execute a sale. We’re not seeing – or hearing – anything along those lines from DraftKings, implying that a sale simply isn’t a priority for the company at this stage of the game.”

On the surface then, the PPB/FanDuel deal appears to be a win-win for both companies and their investors. PPB gets the real prize of the FanDuel customer database and a nationwide and trusted brand, as well as ancillary benefits like an agile technology team, some heavyweight partners and an effective government relations department. Meanwhile, FanDuel investors get the technological know-how to effectively offer sports betting themselves, and potentially partner with casino operators on a B2B basis. In fact, the partnership makes so much sense, it’s likely to just be the first of several marriages between US firms and European operators.