FanDuel Inc. (FLUT) Earnings Call Transcript & Summary

Thank you all for joining us at short notice today. I'm Peter Jackson, the CEO of Flutter. And joining me this afternoon is Jonathan, our Group CFO. I'm delighted to be in a position to announce today that we've reached a deal with Fastball, the 37.2% shareholding in FanDuel to accelerate our buyout of their stake in the business. You will hopefully have seen the transaction presentation that we published on our Investor Relations website this afternoon. I'm going to spend the next few minutes just going through the first few slides of that presentation, which cover the headline details of the proposed transaction; our rationale for the accelerated buyout; and why we believe this is an excellent deal for Flutter shareholders. If we have time thereafter, we'll open the line up for some brief Q&A. As you can appreciate, it's quite a busy day for us, so we only have 30 minutes this afternoon. If we don't get to everyone's questions, our IR team will be on hand to answer any follow-up questions you may have. But let me start on Slide 4 of the presentation and the key terms of the transaction. We've agreed to acquire Fastball's entire 37.2% holding in FanDuel Group for $4.175 billion, increasing Flutter's stake in FanDuel to 95%. Boyd, our market access partner, will continue to hold its 5% stake. Fastball will receive approximately $2.1 billion in cash with the remainder received in Flutter shares. The Flutter shares will have lockup restrictions in place that will wind over 3, 6 and 12 months, respectively. The cash element of the transaction will be funded through a combination of Flutter debt and the proceeds of a placing that we have launched today, which will see us raise approximately GBP 1.1 billion. I'm told that the placing book is well covered at this point in time. The transaction is expected to complete later this month, subject to Flutter shareholder approval given that this constitutes a related party transaction. 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. No assurances can be provided whether and on what terms any such transaction with FOX would take place. And as part of today's deal, Fastball is waiving its existing rights in relation to its future economic interest in FOXBet. Turning to Slide 5 and why we have decided to do this deal now. FanDuel is, by some distance, the market leader in what we consider to be the most exciting market opportunity in the global gaming sector today. By doing this deal now, we are increasing our exposure to that market at a time when the regulation of sports betting and online gaming is accelerating. The stake is being acquired as a significant discount to our own estimates of the intrinsic value of the business, another 45% discount to the enterprise value of FanDuel's closest listed peer. Fastball were keen to avoid a situation where they could be left holding a material minority stake in an illiquid asset for an indefinite period. This could have occurred under the mechanisms previously agreed and so they were willing to trade at a discount to avoid that eventuality. In addition to the deal being struck at a compelling valuation, this gives -- this early buyout also reduces the complexity of our U.S. business and gives us additional flexibility in how we manage the business going forward. And finally, by agreeing this transaction now, we've removed uncertainty for our shareholders and any concerns they may have had about our future buyout obligations. On Slide 6, we try to put the size of the U.S. opportunity into context for Flutter. Based on our current projections, we expect our online sportsbook to be available in 14 states and our online gaming products to be in 4 states by the end of 2021. This will mean they're available to 33% and 11% of the U.S. population, respectively. When those states alone reach maturity, we estimate that there will be worth over $9 billion in GGR. And to put that into context for you, that is roughly the same size as the online markets of the U.K., Ireland and Australia combined. In the U.K., Ireland and Australia, we expect to generate over $1 billion in EBITDA in 2020, with a similar market share to that enjoyed by our U.S. business today. Ultimately, we believe many more states will move to regulated sports betting and gaming. And we estimate that for each additional 5% of the population that has access to sports betting, we think it would add circa $850 million to the TAM, while every 5% in the gaming side would add approximately $1.3 billion to TAM. That would imply that the U.S. market can ultimately be a multiple of our core markets in the future and a source of significant earnings to the group. In conclusion, our business today is the market leader in the U.S. with a material market share gap between it and its nearest competitor. FanDuel is of a scale that is unrivaled in the U.S. online market. And furthermore, with all that Flutter brings to FanDuel, we believe it to be the highest quality asset in the U.S. sector today. By acquiring the stake now and at the discount we have secured, we believe we have removed uncertainty for our shareholders and ideally positioned our group for the future opportunities that the U.S. market will bring. We are delighted to deliver the transaction that we strongly believe to be at the best interest of our shareholders. And with that, I'll hand it over for questions to Nige.

[Operator Instructions] The first question then is from Michael Mitchell from Davy.

Congratulations on the deal, first of all. Just one question, if I can, in the interest of your time. If I could ask around FOX, clearly, they're participating in the placing as per the quote, they seem very supportive of what you've announced today. I guess the question is, just wondering what it means for the future relationship between Flutter and FOX. And how the deal might provide some greater flexibility with respect to your U.S. operations going forward.

Thank you, Michael. Look, I mean, FOX are obviously very important partners for us in the U.S. market. In fact, the first person I rang to sort of bring over the word and talked about this deal was Lachlan Murdoch to tell him. And we're delighted that FOX are participating in our placing and very much appreciate their ongoing support. I think they see how this deal sort of simplifies our overall operation in the U.S., which should provide us with additional flexibility in how we structure the business going forward. And we look forward to talking to them more about how we might be able to optimize our operations to leverage the fantastic reach that FOX has. I mean we needed to do one thing at once. And we've done this deal now. And now we can continue to build on our great asset with FOX in America.

The next question then is from [ Jinesh Mecca ] from M&G Investments.

Congratulations on the deal. I just wanted to clarify, in terms of the financing for the transaction, I have obviously seen the share placement, and you'd be using some cash on balance sheet. Did I overhear you say there'd also be some debt issuance? Can you just clarify if there will be any further debt issuance to this transaction?

No, there'll be none. It's using cash on balance sheet plus the equity for the cash component solely.

The next question is from Monique Pollard from Citi.

Congrats on the deal again. I had 1 question. Just on the FOXBet's 18.5% stake in FanDuel that they have that right to acquire in July 2021. Just wanted to understand the process for coming to a fair value for the 18.5% at that time. Will it be sort of external banks giving valuations to both of you and you coming to a conclusion?

Sure. The FMB exercise, obviously, was set up in the Fastball agreement, and it's -- we each appoint one bank. They both -- each of them comes up with a value of the 15%. We take the average of the 2. If they're more than 15% across, we then jointly appoint a third bank, and it would then become the average of the closest 2. So it's sort of is quite a standard process to make sure we don't have sort of outlier valuations coming into the process.

Understood. And so this valuation that you've achieved for the 37.2%, really has no bearing on what the 18.5% might be valued at in July next year?

Exactly.

[Operator Instructions] The next person is James Rowland Clark from Barclays.

And congratulations on the placing of the deal. Just, obviously, one question. Now that you've got more equity value of Flutter plc tied up in the U.S. opportunity, how do you feel about investing in the U.S. opportunity? Does this change your approach at all seeing the market, looking at the market share very, very closely? Are you sort of looking to maybe up the market share gains or stick to your current more sensible investment approach?

Look, James, we've always controlled the FanDuel business since we acquired it, with our management team, with our technology. And look, we've -- I think we've been pretty aggressive in the market since we started. When you think about what we originally did out in New Jersey and what we've just done more recently in Tennessee when we launched on the 1st of November. So we're determined to serve a business of real scale. But we are using -- we are applying discipline around what we're doing in the market. And we're not going to change that posture. We're very ambitious. We want to build the leading business in the U.S. market. And this transaction is not going to change that. We were previously going to be funding all of FanDuel anyway. This just consolidates our ownership of it and remove some of the complexity that there was around the structure in the business. And of course, allows us to buy sort of at a material discount.

[Operator Instructions] The next question is from Joe Stauff from Susquehanna.

I wanted to ask you just about FOXBet. I understand all the transaction questions, but I wanted to understand your approach for the FoxBet strategy in the U.S., OSB, online sports doesn't seem to be catching other than iGaming. So I was wondering if you can comment on that.

Look, we're very pleased with the way that we've been able to build out our Super 6 franchise over the course of this football season. When I look at the millions of customers that we have attracted through combination of FOX Sports, FOX News and Fox Entertainment, I think we've done a great job with the integrations, and we're really pleased with the way that the whole FOX Family has got behind that. So look, we're very pleased with the progress we're making. Clearly, the FOXBet product, from a sports betting perspective, is not as good as we would like it to be. And that does have an impact when you're putting customers down into the funnel. But that's something that we will make sure we can address over time.

The next question then is from Ed Young from MS.

It was actually something tucked away on Slide 7. You've mentioned that New Jersey is now expected to have a 2020 contribution of positive $40 million. Could you just talk a little bit -- more color around the shape of how that might look going forward? And are there any other states that they are going to get to contribution or near breakeven at this point? Obviously you were the first to have long-standing gaming business, I understand that. But just any more color on that would be very useful.

Sure. I mean, just dealing with that point. I mean, we were trying to demonstrate a couple of points here. Obviously, New Jersey was the first out of the traps in Q3, early Q4 2018. So it's the first of the states where we've actually got a third football season happening, and we've continually talked to you guys, the investors and everybody about the shape of the J curve. And what we were trying to do is giving -- is give people a sort of proof point that actually what we thought was going to happen is happening. Actually, the $40 million is in New Jersey, in a state where we've also spent more marketing than we thought we were going to because the state is still growing faster than we thought it was going to be. So actually, we're exiting into 2021 with an even bigger business than we would have thought at the start of the year. So that's after probably some extra marketing spend. Look, all I can say on the other states is we're not in some states where we're sort of hitting the third NFL season. And we will find a way to be able to communicate how those sort of maturing states are performing versus new states and new state investments as we go forward. But I think that the purpose of this wasn't to try and help you extrapolate. It was to try and help people understand that actually, when we get to -- through this J curve point, we get to a contribution positive point. And we were hoping that, that would be seen as a sort of a clear demonstration of what we expected to happen.

And Ed, I just -- for me, the other point as well is it just -- I think it illustrates -- for some of the cynics out there wondering whether people have better make money in the U.S. market, we want to be able to demonstrate to them that you can. I mean, or certainly that we can with the model that we're using. And I think it also just reiterates the importance of scale. As Jonathan described, this is the contribution. And so the extent to which you can really leverage the risk and trading capabilities, tech and operations below that, clearly, you get a sort of compounding effect the more states you're in.

The next question is from Gavin Kelleher from Goodbody.

Just follow-up on Ed's question -- sorry, first of all, congratulations on the deal. Just following up from Ed's question on the positive contribution in New Jersey. I know it's very early days, but obviously New Jersey benefits from the iGaming cross-sell and the iGaming business in general, in New Jersey. Can you give us any sort of sense on how the contribution could differ between let's say, dual-product states like New Jersey and single product sports book states elsewhere. I know it's very early days, but how different do you think that contribution could be at maturity?

Gavin. Look, apologies, I couldn't make the fireside chat I had scheduled with you at 2:00. I didn't realize we'd have to do it sort of live in front of all these other people, but I'm happy -- I hope everyone now realizes why I had to let you down. Look, clearly, the iGaming cross-sell is important in New Jersey. We've been achieving higher levels of cross-sell than we would have anticipated when we look at our businesses in Europe and think about the way in which we've been able to successfully cross sell iGaming into those franchises. So we're really pleased with the way that, that business in New Jersey is working for us. I think in states where iGaming isn't available, well, we'll have to make sure that we sort of construct products and stuff that really play to what customers are looking after. And if I take something like our same game parlay product, we're one of the few operators that have that available in the market. More than half our actives are using that product now in the States. And I think that is a relative gamification product to sports betting. And I think that you'll see us pushing those products hard in states where iGaming isn't allowed. And we also hope, I think, that we'll see more states choosing to legislate and allow iGaming as a way of driving additional revenues over the coming months and years.

And at the end of the day, Gavin, the CAC-to-LTV equation still going to work, whether you've got cross-sell and iGaming or whether you've only got sports betting. So you're still looking for the same returns. It's just the customer lifetime value, maybe on average, lower in those states without it. And therefore, you'd expect the CPAs to be commensurately lower as well. [Audio Gap]