Former FanDuel employees are suing private equity investors for allegedly cheating them out of their rightful stake in the company following its sale to Paddy Power Betfair.
The new lawsuit has been filed in the Supreme Court of New York. It is backed by FanDuel co-founder and former CEO Nigel Eccles, along with more than 100 former employees.
It reiterates a previous lawsuit that claimed private equity firms and early FanDuel investors, Shamrock Capital Advisors and KKR & Co. artificially lowered the price of FanDuel in the PPB sale to benefit themselves.
The employees are represented by Bartlit Beck LLP.
You can see the full court filing here
What’s different in this suit?
It’s understood the previous case, filed in Scotland, was not successful.
It is important to note that the suits have very different plaintiffs. The original suit was brought forward by the founders, not the whole group of employees,
That suit was bought partially to block the merger from going forward. That type of action can only proceed if the founders are current shareholders, and since they are not, it was dismissed.
What are the FanDuel employees claiming?
Under FanDuel’s Articles of Association, preferred shareholders like the private equity firms were entitled to the first $559 million in proceeds from the deal.
Common shareholders, like the founders and former employees, were entitled to everything above that amount.
Those proceeds also included a 40% share of the newly created FanDuel Group.
The suit claims the PE firms kept the sale valuation under the $559 million figure to ensure they retained full ownership of that 40% stake.
Eccles and other employees received nothing
“Put simply these investors and the board cheated FanDuel employees to give themselves a massive payday,” said Nigel Eccles, a founder and former CEO of FanDuel.
“They failed to ask for an independent valuation, failed to hold a shareholder vote and then hid documents from employees and other investors to cover up their misdeeds. Their self-dealing fails any basic fiduciary or moral standard.”
How much was FanDuel worth?
According to the suit, the same private equity investors valued FanDuel at around $1.2 billion ahead of its proposed merger with DraftKings. The sale to PPB valued the firm at less than half that.
The lawsuit also notes that after the failed DraftKings merger, Moelis & Company offered this information to the board of directors (mostly KKR and Shamrock):
On information and belief, Moelis instead presented potential investors with an appendix to its presentation-prepared at least in part by FanDuel itself-that indicated that FanDuel would be substantially more valuable if the Supreme Court overturned the federal prohibition on state-sanctioned sports gambling.
That analysis assumed annualized revenue gains for FanDuel ranging from $20 to $35 million in year 1 (2018) to $490 to $815 million in year 5 (2022), assuming, FanDuel obtained a conservative 5% share of the U.S. sports betting market. When combined with the expected growth of the daily fantasy sports business, FanDuel was projected to earn more than $1.1 billion in revenue within five years at an average year-over-year revenue growth of greater than 50%.
This suggests a valuation for FanDuel-as a stand-alone company-of more than $10 billion, a valuation almost 18 times the Subscription Price of FanDuel’s preference shares.
What do Eccles and company want?
The plaintiffs added:
The lawsuit will demonstrate how the defendants’ actions were a clear breach of their fiduciary duties, which cost hardworking employees and the founders hundreds of millions of dollars’ worth of shares in the new FanDuel Group, a company that today has more than $285 million in revenues, more than 50 percent year-over-year growth, and continues to be a clear leader in a multi-billion-dollar industry.
What the private equity firms said
In a joint statement provided to LSR, the PE firms said: “KKR and Shamrock stood by and supported the company during difficult times and we are confident that the facts will demonstrate that the allegations in this lawsuit are completely baseless.”
FanDuel is indeed the clear leader in the growing US sports betting landscape. Whether some of its early employees will see the benefit of that could be determined by lawyers and the courts.