Early analysis of the Flutter/Stars tie-up

The Stars Group, Flutter Entertainment Tie-Up Creates Online Gambling Behemoth

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The industry is still working to digest this week’s the news that two of the world’s top online gambling companies are merging to form what is unquestionably the largest.

The Stars Group (TSG, formerly Amaya) has entered into an all-shares tie-up with Flutter Entertainment (formerly Paddy Power Betfair). The two companies were similar in size to begin with, and the deal is structured as a Flutter takeover of TSG.

Shareholders delight

Though sudden, the news isn’t completely out of the blue. Such a deal was rumored to have been discussed last year, but it was generally believed nothing had come of those talks.

Now that it’s official, the parties expect to finalize the deal next year. At that point, TSG will delist from NASDAQ and the Toronto Stock Exchange, and TSG shareholders will receive 0.2253 shares of Flutter per share owned.

Both companies’ stock prices surged following the announcement, though TSG has been the greater beneficiary.

Flutter shares hit a peak of £92.76 about three hours after the London Stock Exchange opened, a gain of 21.5% over the previous close before slipping to close at £80.29. TSG’s similarly surged and dipped to closes up 30% at $19.91.

Barring any signs that the deal might fall through, expect TSG movements to mirror Flutter’s since the shares will eventually be exchanged at a fixed ratio.

A complicated hierarchy

Both companies are complex organizations encompassing multiple brands on their own.

TSG is best known as the owner of PokerStars, but also acquired the British company Sky Betting & Gaming (SBG) last year. Flutter was formed through a merger of Irish betting giant Paddy Power and the British Betfair, so the addition of SBG brings three former competitors in that market under one roof. Flutter also acquired FanDuel in America last May.

Both companies also own other, smaller operations in markets including Australia and Georgia.

Last year’s combined revenues for the two companies totaled around $4.3 billion, enough to make Flutter the clear global leader in online betting and gaming once the deal is final. That number should be considerably higher this year, as the TSG acquisition of SBG was only finalized in July. Its revenues are not included in TSG’s report for the first six months of the year.

Accounting for growth, TSG and Flutter should easily report a combined total of over $5 billion for 2019.

In addition to pooling their revenue, the companies say they expect the acquisition to result in cost synergies totaling £140 million ($173 million) before tax, which will further bolster profits. That’s good news for investors, but probably not for the companies’ employees.

“Cost synergy” is usually a euphemism for the elimination of redundancy, often through layoffs.

It’s about US sports, but not entirely

Most of the coverage of the deal has focused on the companies’ combined potential in the rapidly-expanding US sports betting market. There are good reasons for that, but it’s far from the only market or vertical in which they’ll benefit from combining their forces.

The US market for sports betting is going to be huge, but also dominated by large media-gaming partnerships. TSG managed to land just such a partnership, teaming up with Fox Sports to launch the Fox Bet by Stars platform.

FanDuel, meanwhile, has league-level partnerships with the NBA and MLB.

Once the deal is complete, then, Flutter will have relationships in place with a couple of major sports leagues and a top-tier broadcaster. A daily fantasy sports vertical was also conspicuously absent from TSG’s portfolio, so being under the same roof as FanDuel might be beneficial somewhere down the road.

Despite all the potential it holds, however, the US is still a small and emerging market. Even now, it accounts for only around 5% of the companies’ combined revenues, while almost two-thirds comes from the UK, Ireland, and Australia.

As fast as it’s growing, it will likely be years before the US rivals those other regions.

Flutter gets a foothold in a difficult vertical

For Flutter, one of the big upsides to the deal will be the acquisition of PokerStars. With the European market for poker having been on the decline for nearly a decade now, it’s a hard business in which to establish a new brand or grow a smaller one.

Both Paddy Power and Betfair operate skins on the iPoker Network, but even with its other skins, it is no longer a top 10 operator. Conversely, PokerStars’ dot-com and European sites account for almost half of all traffic in the legal Western markets. It also has some of the best software in the business. It even has the old Full Tilt software on mothballs, in case that could prove useful to another Flutter subsidiary.

Although poker is declining for PokerStars as it is for most other operators in traditional markets, it’s still a big money maker for TSG and should make up almost one-fifth of Flutter’s overall revenue once the deal is complete.

Poker is perhaps even more important as a customer acquisition channel, however. Although it’s a lower-yielding vertical, companies like PokerStars emphasize it in the hopes of cross-selling to the more-profitable sports and casino segments.

TSG also owns another important acquisition tool in the form of Super 6. This free-to-play sports prediction app has proven very popular in the UK for SBG, and TSG has developed a new version for use in the US market in conjunction with Fox Bet.

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TSG taps into Flutter’s experience

On the other end of things, TSG will likely benefit quite a bit from the experience possessed by upper management at Paddy Power and Betfair. Paddy Power has been in existence since 1988 and Betfair since 1999. Although PokerStars has been around almost as long as the latter, its management structure was disrupted when the company went through its reverse takeover by Amaya (which later became TSG).

That move was necessary in order to pave the way for an eventual re-entry to the US market, but it meant that the company had to purge itself of everyone who’d been involved with its violations of US law between the 2006 passage of the UIGEA and Black Friday in 2011.

Prior to the takeover, Amaya was a fairly small B2B company dealing in online casino and slots software. Its top executives had, at the time, no experience operating an international business the size of PokerStars. Its stock has performed disappointingly over the years since the deal, save for a brief spike after the SBG acquisition.

That is presumably one reason Flutter is acquiring TSG and not the other way around, despite the two being similar in size and TSG the slightly larger by most metrics. It may also be a reason that TSG stock benefitted more from the announcement than Flutter’s.

A new power structure

Flutter CEO Peter Jackson will remain in charge, and the majority of directorial positions will be held by Flutter staff. Only TSG CEO Rafi Ashkenazi will retain an executive position, becoming Flutter’s COO after the takeover. Four other non-executive directors will come by way of TSG, including former SBG CEO Richard Flint.

The deal should finalize sometime in Q2 or Q3 next year. By then, the picture of the US sports betting market should be a little clearer. Regardless of how things proceed on that front, though, the two companies round each other out and will have plenty of opportunities to pursue in all markets and verticals.

- Alex is a journalist from Dartmouth, Nova Scotia, Canada. Now site runner for Online Poker Report, he has been writing about poker and the online gambling industry in various capacities since 2014.
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