Gaming company Flutter Entertainment (FLTR), which owns the Paddy Power and Betfair brands, announced an all-share tie-up with Canadian sports betting group Stars to create the world’s largest online betting and gaming company with combined revenues of £3.8bn.
Flutter shareholders will end up owning 54.64% of the new entity. Investors welcomed the news and chased the shares up 14.5% to £87.39p.
Chairman Gary McGann said,’ This is an exciting and transformational combination that will bring together two strong, complementary businesses to create a global leader in the fast-growing online sports betting and gaming industry.’
The move, if successfully voted through, will be a step change for both companies adding scale and scope while reducing the company’s exposure to the UK and Australia.
According to management the deal is expected to increase earnings per share (EPS) by at least 50% in the first year, before allowing for any synergies.
The company has highlighted pre-tax cost savings of £140m a year from combining the businesses as well as potential cross-selling incremental revenue benefits. It will cost around £180m in the first two years after completion of the deal to achieve the savings.
Strong free cash flow is expected to result in a rapid deleveraging of the group. It is targeting a net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio of one to two times in the medium term.
FLUTTER MANAGEMENT TO TAKE SENIOR ROLES
Current chairman Gary McGann will become the chair of the combined group while Dave Gadhia who is the executive chairman of Stars will become deputy chair.
Flutter’s chief executive and finance chief will assume the same roles for the new entity while the current chief executive of Stars will become chief operating officer of the combined group.
Shareholder approval is expected in the second quarter of 2020 while competition approval will take longer and is expected to happen during the second or third quarter.
STRATEGIC RATIONALE
As well as creating a more diversified and balanced revenue stream, the new combination will add momentum to Flutter's US ambitions. Bringing together its leading sports betting business FanDuel with the high-profile FOX Sports business and PokerStars will create a strong market position.
The footprint will include market access to 24 states, an established horse-racing business across 33 states and daily access to fantasy sports betting in over 40 states.
In addition Fox Sports will provide access to over 100m viewers and TV channels available in 45m homes across the US. As part of the deal FOX will have the rights to acquire an approximate 18.5% stake in the FanDuel group from 2021.
Flutter’s shareholders will be entitled to receive the final 2019 dividend of 133p plus a pro-rated amount of the expected 2021 amount that they would have otherwise have been entitled to receive.
It is the company’s intention to maintain the dividend at 200p per share until the group’s net debt to EBITDA falls below two times.
