Flutter Entertainment confirmed this month it could potentially consider an IPO of a portion of its FanDuel stake in the US.
Flutter, which owns 95% of FanDuel, saw its stock jump 7% on the news.
But is it actually a good idea?
Unrecognized value in FanDuel
First, the upside for Flutter: analysts are near unanimous that FanDuel is undervalued compared to DraftKings.
Consider that DraftKings is trading at 27x FY21 sales for a $28.5 billion valuation. Meanwhile, FanDuel Group is projected for circa 30% more revenue than DK in FY2021.
So if it were to trade on the same multiple as DraftKings, FanDuel would be worth around $40 billion.
On par with the parent?
Today, $40 billion is the current valuation for the entire Flutter business. That includes FanDuel and a global gambling business that generated more than $1.4 billion in EBITDA last year.
In other words, Flutter could be sitting on a $40 billion asset not being valued as such because it is listed in the UK and attached to the rest of the business.
As Bank of America put it in a note to clients on Monday:
“We believe that even a small shareholding list of the FanDuel business in the US could help crystallize the value of the US business, boosting Flutter’s overall valuation.”
Competing on equal footing with DraftKings
London-based analyst Jefferies also argued that not equalizing the valuation against DraftKings could be a competitive disadvantage.
For example, DraftKings recently raised another $1 billion in cash via senior convertible notes. Those notes can be repaid in stock, and if DK trades at a higher multiple, it essentially has cheaper access to capital.
That said, FanDuel has less need to raise cash than DraftKings, as the Flutter global business is so cash-generative.
Pump up the value of FanDuel stock?
Elsewhere, a US IPO could make Flutter some extra cash from Fox.
As Peel Hunt analyst Ivor Jones wrote this month, Fox is entitled to buy 18.6% of FanDuel from Flutter in July 2021 based on “fair market value.”
In a recent earnings call, Fox said that value had been determined by a December transaction where Flutter upped its stake in FanDuel to 95%. The deal valued FanDuel at $11.2 billion.
If FanDuel is publicly traded, however, the valuation for that deal could be be up to $40 billion as calculated above. Then Fox will have to pay Flutter a lot more for the stake.
What are the downsides for Flutter?
So far, so good then. But they there’s no such thing as a free lunch and Flutter might face some issues ahead.
For starters, Numis Securities analyst Richard Stuber noted his own valuation for FanDuel was a more conservative $18.4 billion. That’s based upon a 30% share of a $20 billion TAM in 2025, with a 15x multiple on 30% EBITDA margins.
“We can certainly see the appeal of a US IPO in the short term, but our key concern is that DK may be overvalued and therefore FLTR would arguably be chasing a short-term bubble,” Stuber said.
In other words, if the DraftKings valuation is not accurate, a potential $40 billion mark on Flutter might be as well. In that case, there might be less upside to listing FanDuel stock in the US.
Burst the bubble?
Indeed, Simon French, the co-founder of advisory firm Bixteth Partners, warned a FanDuel IPO could help burst that aforementioned bubble.
“I’m not sure it’s the wisest move by Flutter,” French said. “Doesn’t it just shine a light on the fact that the two market leaders will have equity value in excess of $50 billion while industry net gaming revenues are only just north of $20 billion in 2025?”
“Plus neither are close to generating positive cash flow and there’s another 10-15 companies all trying to steal their lunch.”
What a market leader truly looks like
A key here is how the respective markets view gambling companies. In the US, the popular narrative is that DK/FD can build share now, squeeze out rivals, then pump up profit margins later. Think of Amazon in e-commerce for example.
But in Europe, that’s not been the case. Online gambling market leaders rarely get far above a 20% share. And companies are still forced to spend more than 20% of revenues on marketing to retain customers and attract new ones.
As French put it: “This market isn’t the same as other consumer internet sectors where you end up with a couple of winners. And that’s before you think about the impact on share prices of more supply in the market.”
Paul Martino, an early investor in FanDuel and founder of Bullpen Capital, agreed that the entire market is in a bubble. He said that the bubble was market-wide rather than just confined to sports betting. As such, he urged Flutter to take advantage of elevated prices now.
“The bubble is going to pop regardless of what Flutter does,” Martino said.
What about Eccles & Co?
Another concern for Flutter is the ongoing lawsuit around FanDuel and its initial sale to Flutter. Nigel Eccles and other early employees allege that key investors deliberately undervalued the business when selling to Flutter.
The deal was done in 2018 at around a $558 million valuation. Might the employees’ case be strengthened if the public markets valued that same business at $40 billion three years on?
Finally, there’s a small chance European markets do Flutter’s job for them and re-rate FanDuel stock before it is US-listed.
The company’s share price climbed 7% following the news. If market were truly rational, investors would front-run the US listing and reprice the FanDuel business to US standards. And that of course would negate the need to list it all.
Editor’s note: Legal Sports Report does not offer recommendations to buy or sell any securities.
