After announcing its intention to list shares in the US, David Cook examines the logic behind a dual listing for FanDuel parent Flutter Entertainment.
“We believe an additional US listing of Flutter’s ordinary shares will yield a number of long-term strategic and capital market benefits. We look forward to continued engagement with investors and stakeholders on this matter and we will announce the results of this engagement in due course.”
There can be no doubting Flutter Entertainment’s ambitions at this time. The above quote, which outlines plans for an additional US stock listing, was contained within its annual report for 2022, following a previous announcement made to shareholders in November.
Why now?
During that November Capital Markets Day event, Flutter outlined the benefits of a listing of this kind. They included:
Enhancing the company’s profile in the US
Enabling better recruitment and retention of US talent
Giving Flutter access to “much deeper capital markets” as well as new US domestic investors
Opening the possibility for a primary US listing, which would allow Flutter to be listed on prominent US indices
Providing greater overall liquidity in Flutter shares
What further illustrates the opportunity in the US is the current value for investment it offers.
Writing in his February VC newsletter, Tom Waterhouse noted that despite average US P/E ratios falling from 21.8x at the end of 2019 to 18.6x at the end of 2022, stocks in the US still trade at a premium compared to other leading global markets.
Recent performance
The scheme for a US listing has materialised for a second time (more on the first attempt to come) and has coincided with a period where Flutter’s share price has risen considerably over the last eight months. The FTSE 100 company is currently listed on the London Stock Exchange.
In July 2022, shares traded at £76.76 ($93.20), down significantly from a high of £168.90 ($232.40) in March 2021. However, this has almost doubled since July to £138.30 ($166.85) at the time of writing.
The below chart shows Flutter’s rise, fall, and rise again across the last three years:
The last three years is a convenient period to compare Flutter’s share price performance with that of its closest US competitor, DraftKings.
DraftKings started trading publicly on Nasdaq in April 2020 following its merger with special-purpose acquisition company Diamond Eagle Acquisition Corp and sportsbook supplier SBTech.
In similar fashion to Flutter, the share price began to dwindle from its peak of $71.98 in March 2021 as the world began to open up after the end of lockdowns. The stock has improved from the low point of $11.36 in May 2022 to $18.22 at the time of writing.
DraftKings’ performance across the last three years is also illustrated in the chart below:
US increasing in importance
According to Flutter, the firm holds a 50% share of the US sports betting market as of the end of 2022 via its FanDuel brand. This is no mean feat given more than 30 states plus Washington D.C. now offer regulated sports betting.
Within Flutter’s aforementioned annual report, results showed a 27% increase in group revenue for 2022, up to £7.69bn ($9.25bn). Crucially, just over a third of this total was made up of US revenue, which came in at £2.6bn for the year.
This was up 86% from the £1.4bn generated by US operations in 2021, when the region accounted for 23% of total group revenue. Flutter CEO Peter Jackson also noted a record Super Bowl this year, revealing that FanDuel had already acquired more than 1.2 million customers in 2023.
Flutter’s annual income statement displayed not only increasing US revenue, but a higher group revenue mix from the market year-on-year, with the exception of 2020.
The 2020 figures were the first to include those of The Stars Group, a merger through which Flutter took a 54% stake in the combined business before it completed in May.
The below table demonstrates how Flutter’s US revenue has steadily grown since 2019 and how its share of group revenue from the US has risen from 21% in 2019 to 34% in 2022.
The group also recorded $191m in US revenue back in 2018, which was 11% of total revenue. At that time, it was still trading as Paddy Power Betfair, which announced its $158m acquisition of a 61% stake in FanDuel in May that year. That share has since increased to a 95% holding, which came at a cost of $4.2bn.
A consistent trend
Since the Professional and Amateur Sports Protection Act (PASPA) was repealed in 2018, the narrative has tended to point in one direction when it comes to the two standout US operators.
Financial reports from recent years have shown a clear trend of Flutter’s US operations surpassing DraftKings. While DraftKings’ annual revenue has been on an upward curve in a similar vein to Flutter’s, its overall revenue is not even half of Flutter’s, primarily due to the latter’s international mix outside of the US.
The below chart shows how this trend has developed since 2018. DraftKings’ total is almost entirely generated from the US, alongside a small contribution from a handful of other countries.
When examining the dynamics of listing in the US, there are significant differences when compared to the UK.
Paul Leyland of Regulus Partners says: “Every year, more pension funds, hedge funds, insurance companies etc. allocate more and more money into successful companies who are often US-led but global.
“There has been a sort of winner-takes-all thought process, especially in global tech, which has created gigantic companies. It is logical therefore that if you are a business which is tech-orientated, and has a significant US domestic residence because you have US consumers, then a US stock listing is a damn sight more attractive than the UK.”
Take two
As touched on earlier, this is not the first time Flutter has outlined plans for an additional US stock listing. In March 2021, the group confirmed its intention to float FanDuel shares after it had increased its stake in the brand to 95% in December 2020, valuing FanDuel at $11.2bn (the remaining 5% belongs to its market access partner Boyd Gaming).
This strategy came with far more complications as it was planning to spin off and list FanDuel separately.
In April 2021, Flutter said it would not include its Fox Bet brand in any potential IPO. Fox Bet launched in 2019 as a joint venture between Fox Sports and The Stars Group, before the latter was sold to Flutter the following year.
The plan to cut Fox Bet out of the IPO led to a messy dispute with Fox Corporation, after the media conglomerate disputed the valuation at which it could purchase a stake in FanDuel.
When Flutter announced its stake increase in FanDuel to 95%, it flagged the intent to offer Fox Sports an option to purchase an 18.6% stake in FanDuel at fair market value as of July 2021. Fox Corp claimed the agreement was in fact to purchase a stake at FanDuel’s December 2020 valuation.
“If you are a business which is tech-orientated, and has a significant US domestic residence because you have US consumers, then a US stock listing is a damn sight more attractive than the UK.”
Last November, the issue received closure after an arbitrator ruled that Fox Corp could exercise an option to acquire an 18.6% stake in Flutter from a $22bn valuation, at a cost of $4.1bn.
The initial December 2020 valuation was ruled to have been a considerable undervaluation. Fox Corp has a 10-year window from December 2020 to take up the option.
With complex legalities resolved, Flutter is free to proceed, and with far less confusion for investors to worry about. “That’s now been wrapped up, and Flutter have in effect changed their strategy,” Leyland says. “I didn’t personally like the idea of listing FanDuel as a standalone entity, because it’s reliant on Flutter. FanDuel is a division, not a company.
“There are other differences this time too. FanDuel is now a much bigger part of the overall group, so the group does not weigh down as much on FanDuel. There is also reduced risk, partly due to acquisition and partly due to pulling out of Ukraine and Russia. With less than 3% of their revenue now coming from dot com, they know they can withstand any material shocks to their income.”
Not all plain sailing
There are several reasons as to why Flutter appears a safe bet at this time, but it is hardly carrying the tag of being an investor’s dream just yet. The annual report for 2022 showed its net debt had risen to £4.64bn, up considerably from £2.65bn in 2021.
While Leyland concedes the debt is not ideal, it is not likely to act as a deterrent to a majority of investors, in his view. “If the interest rate doubles, then of course that hurts,” he says. “But Flutter has enough momentum that it could raise capital. You raise capital most easily if you’re on a premium, so all things lead to New York.
“I think obviously there will be some investors who say they’re not investing significantly in indebted companies, and that’s reasonable, but what is worth remembering is if you’re still quite small, the US is not a place for you. If you can mitigate the risk, then the US is the more attractive market. In the world of online gambling, that only applies to Flutter.”
“If you’re still quite small, the US is not a place for you. If you can mitigate the risk, then the US is the more attractive market. In the world of online gambling, that only applies to Flutter.”
Another potential challenge to consider is how an increased focus on US could impact European performance, as well as how intertwined the separate listings could be.
Matt Davey, former CEO of SG Digital and founder of investment group Tekkorp Capital, told iGaming NEXT: “While dual listings need to be carefully executed, coupling the world’s largest liquid market with Flutter’s fastest-growing segment is an entirely logical step. In our view, US investors will appreciate the nexus here and find their equity compelling.”
The road ahead may not be unequivocally straightforward for Flutter, but it would appear to at least be in the driving seat of its destiny.
Leyland adds: “If they don’t put a foot wrong, they will get a significant premium. If they do put more than one foot wrong, they’ll probably regret it. But I back them not to put a foot wrong, because I think they’re an incredibly well-run company.”
Flutter referred back to its public comments on the additional listing when approached for comment by iGaming NEXT.
The prospect of a dual listing will be put to a shareholders’ vote at Flutter’s annual meeting in April, needing 75% approval to pass. The vote is extremely likely to be successful.
The board of Flutter Entertainment has opened a consultation with shareholders on an additional US listing of the operator’s ordinary shares.
The growing dominance of the FanDuel brand as part of Flutter’s portfolio has been laid bare in recent financial reports, with US revenue up 82% year-on-year to £598m in Q3 2022.
That put the US firmly in the top spot as Flutter’s biggest-earning market, comfortably ahead of the UK & Ireland which generated £509m in revenue during the same period.
FanDuel is also the standout market leader in the US for combined share of online sports betting and online casino.
In a statement released today (14 February), Flutter said that the trend is expected to continue, with FanDuel rapidly becoming Flutter’s largest business segment by revenue and generating an ever-greater proportion of the group’s overall value.
In that context, Flutter’s board has reached a preliminary view that an additional US listing of the firm’s ordinary shares will bring about several long-term strategic and capital market benefits.
A US listing would enhance the group’s profile in the US, better enable the recruitment and retention of US talent, and give the group access to deeper capital markets and new US domestic investors, according to a statement to shareholders.
Further, a listing would provide greater overall liquidity in Flutter shares and provide the optionality to pursue a primary US listing as an additional step further down the line.
Flutter’s board said it intends to consult extensively before deciding whether to put forward a formal resolution for approval.
In the event there is broad shareholder support for an additional US listing, that strategy would take precedence over any plans to list a small shareholding in FanDuel.
Flutter first announced plans to explore an IPO for a small stake in FanDuel in March 2021, before reportedly dropping the idea last year.
The firm had considered capitalising on a boom in US online gambling stocks which saw the market cap of rival DraftKings hit a record high of $28.5bn, overtaking the value of Flutter in the process.
Goodbody gaming and leisure analyst David Brohan explained at the time: “For better or for worse, a lot of the valuation of FanDuel is tied to DraftKings since it IPO’d.
“DraftKings was trading at 15x forward sales and you were looking at that and thinking FanDuel is a better business, it has a bigger market share, a bigger revenue pool and is losing less money. It also has a better management team.”
Flutter therefore wanted to find a way of unlocking the value of its FanDuel brand, which was thought not to have been properly considered in the company’s overall valuation at the time.
The operator will now undertake its shareholder consultation on the matter immediately and will announce the results in due course, it said.