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Paddy Power Betfair steals a US march

Insight | Analysis

The news that Paddy Power Betfair is buying a majority stake in FanDuel has gone a long way to silencing its critics, says Scott Longley

Until the news broke that Paddy Power Betfair had gotten a headstart in the race to establish a sizeable US footprint by buying up a majority stake in FanDuel, some were beginning to question the point of the company.

It may seem unnecessarily doom-laden given the events following the SCOTUS decision to nix PASPA, but such were the worries after the company announced at the time of its first quarter trading update that it was embarking on a £500m share buyback.

The news seemed to crystallise the fears being expressed about the net effect of the spate of mega-mergers. What if size wasn’t everything? Paddy Power Betfair’s buyback seemed to indicate that for all its hard-won enormity, the company was somehow lacking a creative spark.

To some, there is no surer sign a large company has somewhat lost its way than a share buyback programme. It can be sold as a positive for shareholders – some will opt to get cash for their shares while those left see the benefit of less shares on the market and will have a larger stake in future dividends.

Yet the argument that shareholders know better what to do with the spare cash being generated by any company – PPB had £330m of cash on the balance sheet as of the end of March – is, for all the blandishments, something of an admittance of defeat.

In the words of Paul Leyland, analyst at gambling consultancy Regulus Partners, the company appeared to have lost its “mojo”. Accusing the company and new-ish chief executive Peter Jackson – who took over from Breon Corcoran in January – of playing too defensively, he suggested then that “handing the strategic keys back to shareholders” via the buyback was “playing it safe”. He added that a company of Paddy Power Betfair’s “power and scale should be making more mischief than this”.

I’m Breon and so’s my wife
Yet Jackson would have known better at the time. Although it is very early days when it comes to the nascent regulated US sports betting market, Paddy Power Betfair has by virtue of this move immediately established itself as far and away the largest company active in the market, with pro forma US revenues (including PPB’s existing TVG and Draft businesses) of $265m.

More to the point, Paddy Power Betfair now has access to FanDuel’s 1.3 million actives (as of 2017), who play daily fantasy sports (DFS) legally in 40 states. For those who believed that fantasy was dead and buried – including perhaps even the private equity owners of FanDuel, who managed to elbow out founders Nigel and Lesley Eccles last year and now retain at least a 20% stake for the next five years – it is a welcome second coming.

Whichever way you look at it, the SCOTUS PASPA decision revives daily fantasy and particularly the fortunes of FanDuel itself and its major rival DraftKings, which similarly rode the wave of post-decision enthusiasm with the announcement of its own plans to enter into the sports betting markets.

DFS may be seen by many – particularly the European-based sports betting industry – as only a gateway to the real thing. But for the time being it is, as they say, the only game in town in many states and it will take time for the politicians and various stakeholders to get their sports betting legislative ducks in a row.

The FanDuel deal is an early play for US dominance but it also marks another stage of development in the super-heated European gaming M&A furnace. The speed of the deal announcement and the strategic sense of it all will perhaps have had the effect of slightly bruising the egos of those helming the other big beasts in the sector.

Hence, perhaps, the almost Trumpian claims of the current M&A king Kenny Alexander, who used GVC’s recent trading statement to suggest that the company had been holding “many, many” talks about US partnerships, adding that “whatever we announce, it’s going to be big, it’s going to be bold, it’s going to be aggressive”.

Given the excitement within the sector generated by the Supreme Court’s opinion on PASPA, the likelihood is that more big and bold announcements will be made even before a post-PASPA bet is struck in New Jersey or anywhere else.

Related articles: Paddy Power Betfair buys FanDuel for US wagering push
Paddy Power Betfair reveals revenue, profit drop in Q1
A new dawn for sports betting in the US (paywall)