Fox has filed suit against Flutter over the value of a 2021 option that allows Fox to buy an 18.6% stake in FanDuel.
The suit was filed this week and will be heard as an arbitration before JAMS in New York rather than court.
CNBC first reported the suit, which the companies since confirmed.
What’s the issue between Fox and Flutter?
Fox argues the contract between the two allows it to exercise the option at the same valuation as Flutter paid in a December transaction where Flutter upped its stake in FanDuel to 95%.
The deal valued FanDuel at $11.2 billion. However, Flutter has said the valuation will be based on “fair market value.”
Flutter CEO Peter Jackson previously said that value could be determined by third-party banks. It could also be assessed by the market if Flutter spins out a FanDuel IPO.
FanDuel likely would be valued well beyond $30 billion on the open market. That means this is a multi-billion dollar arbitration process.
In a statement on Wednesday morning, Flutter said Fox’s filing was “without merit”.
The London-listed giant said it would “vigorously defend” its position at arbitration.
What this means for a FanDuel IPO
The exact language of the Flutter/Fox contract will be crucial. But we don’t know that yet, as the suit is confidential.
Fox has some interesting leverage though. According to a source with knowledge of the negotiations, Fox has the power to keep The Stars Group (TSG) assets out of a FanDuel IPO.
That means FanDuel would have to list without Fox Bet and without PokerStars.
These assets, along with horse racing arm TVG, are a key part of FanDuel’s leadership in US sports betting.
In addition, Flutter would also have to keep funding Fox Bet at an equivalent level to FanDuel, according to terms of the contract between the two companies.
To IPO or not IPO?
That said, one Wall Street analyst noted that even a standalone FanDuel IPO (without Fox Bet et al) would achieve a much higher valuation than the $11.2 billion implied by Flutter’s December investment.
“One could argue this might accelerate any IPO plans,” the analyst, who requested anonymity, said.
But that’s not a consensus view. One London-based equities analyst told LSR: “If Fox wins the case it clearly reduces the incentive for Flutter to IPO Fanduel, as that was probably the driving factor.
Why does this contract even exist?
That contract was worked out in 2019 when Flutter was acquiring The Stars Group. Stars ran Fox Bet in partnership with Fox.
Fox gave over full ownership of Fox Bet to Flutter in that deal. In return, it received options to acquire 50% of Fox Bet, as well as the 18.5% in FanDuel.
Fox argues those options were essentially payment for giving up its ownership and waiving some exclusivity rights around TSG running a competing sportsbook. But if it only got options at fair market value, then those options are essentially worthless.