A court battle for the daily fantasy sports merge may not be a lock
Legal Sports Report

Will DraftKings And FanDuel Actually Fight To Merge In Court, And Other Questions About The Road Ahead For DFS’ ‘Big Two’

DraftKings FanDuel road ahead
The daily fantasy sports industry was turned on its head this week.

First, news came down that the Federal Trade Commission would try to block the merger of DraftKings and FanDuel.

Then came a report from Axios on the financials of those companies heading into the merger, when it was announced last fall. The bombshell there was that DraftKings posted an operating loss of half a billion dollars in 2015. (Both companies also posted significant operating losses in 2016, per the documents reported by Axios.)

Where does everyone go from here?

The DraftKings-FanDuel merger: A court battle or no?

Whether FanDuel and DraftKings both fight the FTC in court appears to be an open question. No one from either company has indicated, for certain, that they will.

Reading the tea leaves, here’s what we have:

  • A joint statement from FanDuel CEO Nigel Eccles and DraftKings CEO Jason Robins (emphasis added): “We are disappointed by this decision and continue to believe that a merger is in the best interests of our players, our companies, our employees and the fantasy sports industry. We are considering all our options at this time.”
  • An internal DraftKings email saying (again, emphasis added): “We…are working with our legal team and FanDuel to chart the best court of action, which could include going to court to make our case about the benefits of the proposed merger.” (The same email did say DraftKings “will ask a federal court to issue an injunction against” the FTC action.)

Notice that neither says going to court for the long haul — beyond that initial proposed action by DraftKings — is a done deal.

Before the merger…

There’s also this underplayed bit from the Axios report on a FanDuel pre-merger document to investors:

“If completion of the Transaction does not occur, the value of FanDuel Shares as well as the FanDuel Group’s ongoing business may be adversely affected, including as a result of (i) having to pay certain non-recurring transaction costs relating to the Transaction (including legal, advisory, accounting and other professional fees), and (ii) having to devote significant attention and resources of the management of FanDuel to the Transaction, instead of pursuing other business opportunities that could have been beneficial to the FanDuel Group.”

If people one one or both sides think going to court is a losing battle — that time, money and energy are best invested elsewhere — might they skip it altogether? That appears to be at least a possibility.

The path to profitability for DFS?

The Axios report/FanDuel merger document also confirms what we already knew: Neither company is terribly close to profitability, right now.

The numbers from 2015 serve as an outlier in terms of marketing spending. They included hundreds of millions of dollars spent on TV commercials. But getting to profitability in the short term still looks like a tall order. It would obviously require either:

  • Cutting costs in a major way. The merger, if it were to happen, would obviously accomplish that. The sites are still tied to sponsorship deals of varying lengths and terms. And the need to lobby for fantasy sports bills in a variety of states will continue on for years, in addition to paying new fees and taxes as laws are enacted.
  • Finding a way to generate large amounts of new revenue. The way DraftKings and FanDuel run their business — taking about 10 to 15 percent of all entry fees — requires a huge amount of liquidity to succeed. Right now, both companies are trying to grow organically (read: not like their approach in 2015). Getting revenue to outpace expenses — in a meaningful way — seems like a tough get, with the way things stand right now.

FanDuel, for its part, has intimated in the past that it could be profitable immediately if it chose to focus on that rather than growth. Of course, the valuations of the companies are based on future growth and prospects, not trying to make money right now.

Larger audiences?

The DFS industry still covets bigger audiences. FanDuel and DraftKings have their eyes on the larger universe of sports fans in the US and beyond. They have only penetrated a small percentage of that audience.

More realistically, they still hope they can make inroads with the larger fantasy industry. New research presented at the Fantasy Sports Trade Association summer conference estimated the universe of fantasy sports players of any type in the US and Canada at 59.3 million people. Finding a way to convert those people to DFS would seemingly be a necessity moving forward.

One other scenario: The merger doesn’t happen, and one company comes out on top.

What happens in NFL season?

The summer is the downtime for the DFS industry. (That excludes the upticks for DraftKings around the biggest golf tournaments on the PGA Tour.)

DraftKings and FanDuel focus their efforts on their daily fantasy football offerings; the rubber meets the road for both — and the rest of the industry — from September through December.

Right now, it looks like the two sites will continue as they were — being competitors. That’s been the dynamic, ever since the merger was announced, of course.

While DraftKings has raised funds since the merger, FanDuel has not (at least not that is publicly known). Of course, we also know that DraftKings has spent a lot more than FanDuel in the past.

Neither company probably wants to go through another 2016, which saw a bit of growth but was relatively flat, but the uncertainty of the merger might not leave other options. What, if anything, will they do to spur growth? (We also know Paddy Power Betfair plans to leverage its fantasy platform, Draft, with a substantial marketing spend.)

What the “big two” will do come NFL season — merger or no — will be interesting to watch.

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Dustin Gouker
- Dustin Gouker has been a sports journalist for more than 15 years, working as a reporter, editor and designer -- including stops at The Washington Post and the D.C. Examiner.