Last week, both The Stars Group (TSG) and Flutter Entertainment PLC released information about their third-quarter financials.
These two companies agreed on a deal last month for Flutter to acquire TSG. When it goes through next year, Flutter will be far and away the world’s largest gambling operator.
There are various benefits to the two companies merging operations. One is that they each have powerful, yet complementary positions in the US market.
TSG owns PokerStars, the world’s largest poker brand. It also owns the new Fox Bet sportsbook brand, developed in partnership with the broadcaster Fox Sports. Meanwhile, Flutter owns FanDuel, a daily fantasy sports giant whose sportsbook also happens to be the market leader in several important states.
The financial information that the two companies released last week provides us with additional insight into their respective positions in the US.
TSG issues full financial statements on a quarterly basis, so these releases contain a lot of detail. That said, many important developments for its US operations only took place in the last two months and don’t show up in its third-quarter reporting.
TSG’s global revenues were up 10% in Q3 on a year-on-year basis. On the other hand, its profits were down. The company turned a $10 million profit in the third quarter last year, but lost $52 million this year. This is likely related to costs incurred by the expansion of its activities in new markets, such as India and the US.
Although TSG is most closely associated with the PokerStars brand, poker is diminishing in importance for the company. It’s the only vertical which experienced negative year-on-year revenue growth in the quarter, at -11%. Casino gaming and slots were up 7.5%.
Sports betting was the fastest-growing vertical, but not because of Fox Bet. Rather, its 38% revenue increase is largely thanks to Sky Betting & Gaming, which TSG acquired last year. As a result, the UK now accounts for 60% of the company’s sports betting revenues.
Australia accounts for a further 32%, while the rest of the world – including the US – is a mere 8%. That said, sports betting stands to be huge in the US, and TSG clearly has big ambitions with Fox Bet, so we expect these numbers to spike over the coming year.
Because the US is currently such a small part of TSG’s business, its financial reporting currently doesn’t separate it from international operations. However, New Jersey was the only state in which it operated in Q3, and its land-based partner there, Resorts, reported $1.75 million in poker revenue for the third quarter. That’s just 0.3% of TSG’s global revenue for the quarter.
Those numbers don’t include PokerStars Casino or its sportsbook, which was still known as BetStars for most of that quarter. Even including these, it’s safe to say that well under 1% of the company’s worldwide revenues came from the US in Q3.
By contrast, Flutter releases a detailed account of its finances on only an annual basis. Last week’s release was instead a “Trading Update,” consisting of a few key numbers, bullet-point highlights and a summary of its operations in various markets.
Because of its ownership of FanDuel, Flutter has a much more established US market presence than TSG. That includes business in Pennsylvania dating back to July 22, mere days after the state first opened for business.
Flutter’s combined global revenues were also up 10% year-on-year, just like TSG’s. The gains were largely due to Flutter’s US expansion, though Australia was also a growth market.
Aside from Pennsylvania, FanDuel launched its sports betting product in four other states in Q3: Indiana, Iowa, New York, and West Virginia.
As a result, Flutter’s US revenues were up 67% year-on-year in Q3. It ended the quarter with a market-leading 200,000 sportsbook customers, and says it has added another 50,000 already in the fourth quarter.
FanDuel Sportsbook had nearly a 50% market share in Pennsylvania in Q3. It was also a market leader in New Jersey, though its share there was only 18% due to the larger number of competitors operating in that state.
Flutter’s revenues from the US market totaled £91 million for the quarter, or $117 million. Comparing that to TSG’s $1.75 million from poker in New Jersey, we can see where these companies differ in terms of established US presence.
That presence is almost entirely in the sports space, however, including both the original FanDuel daily fantasy sports product and its new sportsbook. Flutter has no US poker product at all. Its casino and slots vertical are rapidly growing, up 174% year-on-year in the US compared to 55% for sports, yet it still accounts for just 16.5% of revenues there.
TSG’s and Flutter’s releases appear in line with what investors expected, as neither stock value has shown movement over the past week. TSG’s stock increased in value by 42% and Flutter’s by 7% after the deal was announced, but both have since stabilized.
It wouldn’t be possible for one to change without a corresponding move from the other, however. That’s because each TSG share will be exchanged for 0.2253 Flutter shares once the deal goes through.
At current trading prices, the ratio in the two companies’ stock values is 0.2085, up from 0.2023 in late October. The difference between that and the 0.2253 ratio at which shares will be exchanged is a reflection of investor uncertainty over whether the deal gets finalized as planned. The fact that the gap has narrowed by 27% over the last three weeks tells us that it’s seen as increasingly likely that it will go through.
Assuming it does, the deal should be finalized sometime in the second half of 2020. In the meantime, each company’s end-of-year results will tell us a lot more about their standing in the US market.