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Source: FanDuel
Fox has filed a confidential lawsuit against Flutter, the U.K.-based majority owner of FanDuel, to secure its option to buy into FanDuel Group at the same price Flutter paid in December — a much lower price than what Flutter believes FanDuel is worth today.
Fox wants to acquire an 18.6% stake in FanDuel at an $11.2 billion valuation — the value set when Flutter acquired a 37.2% stake in FanDuel from Fastball in December. But Flutter has argued Fox must pay “fair market value” to exercise the option in July. That price could be determined by a FanDuel initial public offering, which Flutter is considering. If FanDuel isn’t spun out by July, Flutter has said that banks will determine FanDuel’s fair value. That value is likely to be higher than rival DraftKings‘ $25 billion market capitalization, given FanDuel’s higher market share in key markets.
Fox filed the suit last week to New York’s Judicial Arbitration and Mediation Services (JAMS), a company spokesperson confirmed.
“Fox Corporation has filed suit against Flutter to enforce its rights to acquire an 18.6% ownership interest in FanDuel Group — an American sports betting brand — for the same price that Flutter paid for that interest in December 2020,” a Fox spokesperson said in a statement given to CNBC. “The suit was filed as an arbitration before JAMS in New York, NY by consent of the parties.”
Flutter is considering taking FanDuel public — as first reported by CNBC last month — as the sports betting market is on the verge of exploding, with 19 states set to vote on mobile legalization this year. U.S. sports betting led to $30 billion in gross gaming revenue in 2020, according to The Action Network, a sports gambling news and analysis company.
It is unclear if the Fox lawsuit will interrupt planning around the FanDuel IPO. If an IPO proceeds, pending litigation could affect how investors value a publicly traded company.
A Flutter spokesperson did not immediately respond to request for comment.
Valuing FanDuel
FanDuel has consistently led DraftKings in market share in Illinois, New Jersey and Pennsylvania — three of the largest legalized sports betting markets. That has given Flutter and FanDuel executives confidence FanDuel will be valued at a premium to DraftKings, according to two people familiar with the discussions, who asked not to be named because the discussions are private.
Flutter Chief Executive Peter Jackson said in March during his company’s earnings conference call that Fox would have to pay fair market value for its 18.6% stake in July 2021.
“We will honor our commitment to give Fox an option to acquire 18.6% of FanDuel at fair market value in July 2021,” Jackson said. “To be clear on the valuation, FOX will have to pay the fair market value, which is different from the negotiated price agreed between Flutter and Fastball, which reflected the specific circumstances that Fastball found itself in. The valuation will be carried out in the same manner that would have occurred had Fastball still owned the stake.”
But in December, when Flutter announced its intent to acquire a 37.2% stake, Jackson’s statement was more ambiguous, suggesting Fox would get “the same terms and valuation mechanism” from December’s deal with Fastball.
“We intend to offer our media partner, FOX, the option to purchase 18.5% of FanDuel at fair market value in July 2021, with substantially the same terms and valuation mechanism that the parties previously agreed would have applied to the Fastball put/call options.”
Fox claims Flutter is inventing the 2021 fair market value clause after the fact, arguing that no such wording existed at the signing of its initial contract, according to people familiar with the matter, who asked not to be named because the lawsuit is private. Fox executives believe a fair market value clause essentially nullifies the existence of the option — especially if an IPO takes place before July 2021, when fair market value would be the open market trading price of the company.
Stars Group-FanDuel merger talks
There’s another factor complicating the situation.
Flutter is also the owner of the Stars Group, whose U.S. business includes PokerStars and Fox Bet; it acquired the company in a $6 billion all-stock deal in October 2019.
Fox Bet directly competes against FanDuel. While Flutter has committed publicly to supporting a dual-brand strategy in the U.S., promoting Fox Bet comes at the expense of FanDuel’s growth.
Currently, Fox has a 10-year option to buy half of The Stars Group’s U.S. business. For months, Fox has pushed Flutter to include The Stars Group in a FanDuel IPO by formally merging the Flutter entities, according to people familiar with the matter. Fox believes that option exists alongside Fox’s 18.6% stake in FanDuel, according to people familiar with the company’s thinking.
The companies have discussed merging and potentially eliminating Fox Bet, according to people familiar with the matter. But Fox says it would need to be compensated for its option if The Stars Group merges with FanDuel. Instead of cash, Fox has pushed for more equity in an eventual FanDuel IPO, according to the people.
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