DKNG - Flutter: FanDuel IPO Waiting Game Heading For Likely Launch By Q4 2023 Or Earlier

2023-03-27 15:00:54 ET

Summary

• FanDuel Group parent Flutter Entertainment plc's shareholder survey showed that 75% approve of the plan for a separate IPO for FanDuel. Confirmation should come at the annual meeting late next month.
• By many measures, this is highly bullish news for the sector. A FanDuel pure play brings the #1 platform---a pure play--in the sector.
• The proposed spinoff will start trading life as a company with a 45%-50% share of the U.S. sports betting market.

“All good things arrive unto them that wait—and don’t die in the meantime….” Mark Twain.

Since the initial explosive charge of sports betting stocks after the U.S. Supreme Court ruling in 2018, the sector has gone through a predictable cycle: Stage one, soaring, irrational ebullience that saw the usual trees-growing-to-the-skies delusions. Particularly sizzling were the shares of DraftKings Inc. ( DKNG ), which ran from its IPO level ~$20 in April of 2020 to a dizzying high of $72 by March of 2021. The key driver of the frenetic trading was the simple fact—totally understandable—that the only true pure play in the space was DKNG.

But there can be little doubt that delusions about where the industry was headed were enabled by many analysts. Some forecast absurd projections of a business that would grow to $200b in annual revenues based on nothing but models sculpted out of algorithms that were borderline bogus. But Mr. Market took the bait. And yes, there were indeed savvy investors who rode the rocket, jettisoned at near highs, and floated down on golden parachutes into a sea of cash. But for the most part, investors who hung in too long took a bath.

The calculus was based purely on a sales growth catalyst, the underlying assumption being that DKNG’s management would find a way to steadily reduce its excessive marketing expense as it continued to grow revenue. Industry peers were all doing the same thing weren’t they? Add to this the first class job DKNG had done converting their fantasy sports customer base to real money gamblers and you had a bull scenario.

The American Gaming Association ("AGA") announced the results of its study on the participation rate for March Madness. The result: 68m Americans planned to bet $15.5b either online, at a live sports book or participating in bracket contests for fun. Of this total, the study projects that 31m will access legal online sites, 21.5m will bet friend to friend, and 56.3m will drench themselves in bracketology. At this writing, 33 states plus Washington, D.C., have legal live sports betting. Three more markets are awaiting launch at some point this year. Over 146m American adults (57%) live in a legal sports betting market. So, the sales growth element in valuing sector stocks remains strong, though investors remain wary of when these platforms will turn profitable.

Above: One of the research reports during the early frenzy that indicates what had driven the wild runup of DKNG and other sports betting stocks. A more realistic forecast is ~$40b by 2027-30.

Once reality began to set in, it took the stock down as low as $10., The running for the exits abated and since then, DKNG has settled into a trading range that is far more realistic. At writing, $17.22 seems about right—but profitability still eludes them.

But the one perspective that continues to hold in our view is the pure play theme in DKNG. When you look at the rest of the sector, you see either globally based online betting operators with established businesses in the UK, EU, and other regions plus the U.S. Furthermore, there are the U.S. casino sports books whose trading ranges contain some valuation to their online units but, by and large, still rise or fall on the post-covid performance of their brick and mortar casinos.

Among the global operators sits the biggest of all, Flutter Entertainment plc (PDYPF) (PDYPY), the Ireland-based world leader in online gambling. It owns U.S. market leader FanDuel Group, which at this writing, is the #1 revenue generator in the U.S., leading in 15 of 18 markets. FanDuel is believed to currently hold between 42% and 50% of the total U.S. sports betting market, projecting it will attain well over $3b in 2023 revenue. Its margin at 7.7% sits a bit above the long-term mathematically proven norm hold for sports betting at 7%.

Our current consensus estimate of the U.S. sports betting market is that it will reach ~$40b in total revenue by 2018. Should FanDuel hold share until then while having tamped way down on marketing spend, you would be realistically looking at a revenue base at ~$18b to $20b annually, which would have long been profitable. And that is what forms the basis for a long-awaited move by its parent to spin off its FanDuel unit as a separate, U.S.-traded sports betting company. When that happens, it would give investors who believe the pure play theme makes sense a choice. One needn’t own both. DKNG will do fine, but FanDuel is a far better bet.

Flutter holders survey: 75% approve of FanDuel spinoff

Currently, U.S. investors who see great returns driven by spectacular Q on Q sales growth reported by many platforms in the sector hold its NASDAQ-traded Flutter Entertainment shares under the PDYPY ticker. At writing the stock is trading at $86 against a 52 week range of $43.71---$88.12. The one-year consensus target is $96, which bakes in y/y FD quarterly sales growth, diminishing marketing costs moving toward profitability before the end of 1Q24.

Since 2021, FLTR management has set a goal to bring FanDuel public as a separate U.S. entity. But a series of obstacles, mostly macro plus legal steps to vault, has delayed them. Now the company has gotten serious and put in place a series of actions that it believes could produce a FanDuel U.S.-traded IPO before the end of this year. If successful, it would make the stock not only a pure play like DKNG, but an immediate market leader poised to sustain that leadership in the years ahead.

Next step : Next month, FLTR shareholders will be asked to confirm their approval of the FanDuel IPO through a proxy vote at the annual meeting. Industry sources we have spoken to unanimously agree that FLTR holders will provide a consensus approval of 75% and trigger the legal steps that will result in the long-awaited public issue in the U.S.

There are good reasons for the positive sentiment both by management as well as for investors. The stock clearly would raise visibility for Flutter Entertainment’s U.S. profile. It would give the company immediate access to U.S. capital markets. This could mean a considerable shot that a U.S. FanDuel can acquire second and third tier sites with a combination of cash and stock that would not materially dilute holders. Consolidation in the space is not an IF anymore. It’s only a WHEN.

Trading volume: At the moment, PDYPY’s average daily trading volume is ~630,000 (London parent shares) shares vs. DKNG at 12.5m (NASDAQ). Our discussions with bankers and traders in the pace tell us that a FanDuel stock would easily leap to a similar, if even larger, daily volume than DKNG.

Said one banker,

“Look you would have a market leader, not previously available as a pure play per se. If these guys are right—and the numbers are pointing that way---that they will turn profitable by the end of this year—you have the makings for major institutional buy in combined with the retail allure currently enjoyed by DKNG.”

PDYPY’s current ratio of 0.87 vs. DKNG’s at 1.57 is a negative because as an avatar of the globe’s biggest operator, it carries a lot more debt, $6b. But DKNG’s current ratio is a healthier 1.67, with cash at $1.3b, winnowing down from $2.6b in 2021—literally half of its cash burned through since then. PDYPY has $2.4b in cash. PDYPY’s cash stood at $2.35b in 2021, so clearly its capital structure in that area tells much about how its business uses cash for marketing among other things.

An IPO will necessitate management addressing the debt issue in filing. So on balance, it is fairly certain than a FanDuel IPO would get a solid reception from Mr. Market whenever it debuts. But it would be misleading to suggest that a rousing welcome to a FanDuel IPO would trigger a bearish outlook for DKNG. One can envision a segment of Mr. Market liking the long-term bull case for FanDuel above that of DKNG and moving money from one to the other.

At the same time, it would also appear than a fast run up on FanDuel shares could bring its trading range way above DKNG and therefore present another scenario to investors: DKNG is getting its act together on marketing spend. Its Q-on-Q sales growth remains strong. It is a very close #2 to FanDuel in total revenues. So, they will hold their true believers as well.

The takeaway

There is a detailed analysis of the steps Flutter Entertainment plc holders have ahead to reach approval under both current London and Dublin exchanges and securities laws. Its accessible on the FLTR investor relations web site now.

What is unknown at this stage naturally is how the bankers will price the issue. There are so many questions at this time in terms of the general tone of the market, year-to-date revenue totals of sports betting prior to the NFL season, new states about to go live (or not), etc. To that add the usual metrics found in offering documents that blueprint the existing business, comment on its potential and rationale for the pricing. One guideline we can use is the valuation put on the U.S. FanDuel business at $22b by the New York courts.

That was the amount arrived at by the arbitration panel who oversaw the dispute between FLTR and Fox (FOXA). Fox acquired an option to buy 18.6% of FanDuel in 2020 for $2.1b and insisted that is what it would pay to exercise that right in 2022/23. A New York court ruled its option was upheld but not its valuation. Based on subsequent performances since the deal was struck, the court held that Fox must pay $3.7b for its 18.6% of FanDuel.

Using the court’s assessment of $22b is realistic. But we don’t know what the float would be, and how the assumed value of $22b will either stay where it is or rise once more given a robust year ahead. So, it is mere conjecture at this point to guess where the shares will debut.

What we do feel highly bullish about is this: If the bankers don’t get real greedy, as they sometimes do, and float the shares at a price with a well-reasoned comp to DKNG’s trade at the time, the FanDuel shares hitting the market will run.

As too much about the potential as well as the ills of the sports betting space is now known, we do not see a rocket ride of the kind DKNG experienced. Yet it is clear that a sensibly priced IPO will run, presenting investors with what we believe will be the single best shot at returns in the space since the 2018 SCOTUS decision. With the clarity that pure play stocks present in growing consumer markets, it will remain a far easier call to make for analysts than was the DKNG debut.

Investors are guided to stay tuned on this. Next news should break on April 28 th when word that Flutter holders have confirmed approval of a FanDuel IPO. After that, events should move as management statements indicate: By 3Q/4Q 23.

Without knowing opening prices, size of float, percentage of equity offered, management structure, we put this one ahead of itself: it’s a strong conviction stock that will scream buy.

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