Last Resort? FanDuel, DraftKings Reportedly In Merger Talks

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FanDuel DraftKings rumored DFS merger

Bloomberg is reporting that daily fantasy sports sites DraftKings and FanDuel are in merger talks.

Details are scant so far — only that the two biggest DFS operators are in talks to become one. More from Bloomberg:

Investors in DraftKings and FanDuel, which are privately held, have been pushing for a tie-up for some time, according to the people, who asked not to be identified as the discussions are private.

The mechanics of the possible deal are unknown — i.e. whether it is an acquisition of one company of the other or a true “merger.” The more likely scenario would be a FanDuel acquisition of DraftKings, because of the believed cash positions of the two companies.

The future of the industry could also largely hinge on the New York legislature possibly passing legislation this week.

Why now for merger talks?

A well-placed source with knowledge of negotiations said they believe the merger talks represent a “hail mary” by DraftKings to save the business.

Sources indicated to Legal Sports Report that DraftKings was unable to close a financing round recently. That could have led to the start of more serious talks between the two sites, or at least increased the velocity of talks.

There is also the possibility that a legislative defeat in New York would make things more tenuous for both sites moving forward. If NY were to fail to pass a law legalizing and regulating DFS, it would send the question of DFS legality back to the courts as part of a settlement with Attorney General Eric Schneiderman. NY, of course, is one of the largest states in terms of DFS users and revenue.

The merger reports also come as the fantasy sports industry converges on New York City for the Fantasy Sports Trade Association summer conference.

The FSTA conference in New York is also an interesting time and place for the merger talks to ramp up, and occurs near the headquarters of the major sports leagues — NBA, NHL and Major League Baseball — all of whom have equity positions in either FD or DK.

The idea of a merger has been around for a long time, even floated by DraftKings CEO Jason Robins in September.

Why a DraftKings-FanDuel merger would make sense

There are a number of reasons why a merger might be a good move, given the current legal environment. That environment is far less friendly than it was a year or even a few months ago, with legal issues and challenges in a variety of states and federal investigations reportedly ongoing.

Legal and lobbying costs

The legal and lobbying bills certainly are piling up for both companies. While they are generally pulling in the same direction in attempting to get DFS legislation passed in states, they still deploy their own lobbyists and lawyers wherever is necessary.

And while both companies once had piles of venture capital to deal with these issues, they burned through a lot of that. Duplicative spending on fighting legal battles and bending ears is statehouses is not a particularly stellar use of resources for the two companies, when those efforts could be combined.

No more, or at least less, competition

While there are differences between the two products, DraftKings and FanDuel essentially offer the same thing: paid-entry fantasy sports under a salary-cap model.

If they were one company, they could stop spending against one another to acquire customers via marketing and advertising spend. Instead of putting effort into attracting users to one platform or the other, they instead reap all the revenue as a single entity.

Data from indicates that traffic at both DraftKings and FanDuel has reverted to levels seen at about this same time last year, despite hundreds of millions of dollars spent by the two sites at the start of football season in 2015.

While some of that has to do with states that the two sites no longer serve because of legal issues, the massive spend did not result in a substantially higher floor in traffic for either company.

Less cost for staff

For the same reasons as outlined above, an acquisition or merger would result in reduced cost for staffing, as there would be no reason to retain all the employees and infrastructure that currently exists.

Whether a DraftKings-FanDuel single entity would exist under one banner or remain separate products, having everything under the same umbrella would result in lower costs.

Why a DraftKings-FanDuel merger would not make sense

There a lot of reasons why a merger might not be a good fit, many of which were outlined at Legal Sports Report a few months ago.

Venture capital

FanDuel and DraftKings, separately, have raised hundreds of millions of dollars. A merger would represent a massive hit to the potential return on investment for the venture capital backing each company.

Of course, right now, the valuations of both companies are likely well below the unicorn, billion-dollar status they both achieved in summer of 2015.

A merger would be a tacit admission by the backers of both companies that two large DFS companies cannot be sustained in the current market.

An industry source told LSR that they believed the merger is a way to “save face” for entities associated with the two companies — including the pro sports leagues.

The source said that if one of the two companies were to fail — i.e. without a merger — it could result in a chilling investment market for the surviving company. The source went on to say that the merger talks likely are the result of investment firms losing faith in the industry and the two firms they have developed to date.

What does one company have that the other wants?

Other than reduced competition and less spending, do FanDuel and DraftKings need each other for very much?

The league and team deals each company has in place are obviously valuable, but they are also liabilities in terms of cost. Even with the benefits of marketing deals in sports like pro basketball and baseball, the result has not been a massive uptick in handle and revenue that one would expect out of such investments.

Monopoly issues

DraftKings and FanDuel already represent a de facto duopoly in the DFS industry; they are believed to control more than 90% of the market as currently situated.

That would mean a merged DFS company would likely represent a monopoly, which could raise anti-trust concerns.

Is anti-trust violation likely to be brought up via the federal government? It’s at least possible. But DFS is a relatively niche market, and it’s not of the size of serious potential monopolies in other industries.

Also, if one of the two companies were in a desperate financial situation, it would look more like a bailout than the creation of a monopoly, and could be treated as such.