John Mulligan: 'Stars align for Flutter, but hurdles remain for transformational deal'
This deal is huge. Judging by the soaring share prices in Flutter Entertainment and The Stars Group yesterday, most shareholders certainly seem to like the plan to create a global gaming and betting giant.
It's all a very, very long way from the humble beginnings of Paddy Power, which started life in 1988 with the merger of 40 outlets that were owned by David Power, Stewart Kenny and John Corcoran.
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The advent of online gambling has transformed the global landscape for the sector.
Liberalisation of the US betting and gaming market - as more and more states regulate such activity - presents a massive potential prize for the companies that can move quickly to establish a strong presence there.
Flutter Entertainment chief executive Peter Jackson told analysts yesterday that the opening of the US betting market is "perhaps the most exciting development in this industry since the advent of online betting".
"We're determined to win in this market," he said.
Last year, Flutter merged its US business with that of FanDuel, a fantasy sports and betting business. The Irish group took an initial 61pc stake in the combined business, with an option to increase that to 80pc within three years and 100pc within five.
Under the terms of the Stars deal announced yesterday, Fox Sports will have an option to buy an 18.5pc stake in FanDuel from 2021.
FanDuel had a 50pc share of the sports betting market in New Jersey at the end of June, and a strong presence in the newly regulated Pennsylvania market. It already has more than 200,000 sports betting customers and more than 8 million customers across 41 states.
Mr Jackson said that the group would leverage Star's experience with Sky Bet experience in the United States.
"The goal of the entire team remains going live in as many states as we can, as quickly as we can, and continuing to acquire sports betting customers in as focused and disciplined a manner as possible," he said.
"This deal is about delivering growth," he added, pointing out that the global gaming industry is worth about $450bn (€411bn), and "growing at pace".
But the online business still only accounts for about 11pc of the total annual global spend.
The enlarged group will have a presence in more than 100 countries, and will comfortably take top three positions in Germany, Spain and Italy.
Geographic diversification and intense cross-selling are two of the key goals of the planned acquisition. Flutter has already successfully encouraged betting exchange customers to try sports betting, while Stars has persuaded its poker players to try casino games and betting.
Half of FanDuel's customers in New Jersey came from FanDuel's existing daily fantasy business, while cross-sales had given the group a 15pc market share in online casino gaming.
But this deal has yet to clear some major regulatory hurdles.
While Flutter executives said they are confident of receiving approval, they declined to say whether they thought Stars or Flutter would be required to sell any brands in order for the acquisition to be sealed.
One Credit Suisse analyst also questioned if the process would be as smooth as expected in Australia.
Quest, a brokerage unit of Canaccord Genuity, said Flutter shareholders are the losers in the planned deal.
"This is a classic example of a good company with strong cash flow returns rescuing the shareholders of a poor one," said analyst Graham Simpson, noting that returns at Stars have been poor.