News reports are calling it a mega-merger, a massive takeover to create the largest online betting operator in the world. Flutter Entertainment will acquire The Stars Group.
In terms better understood by many in the poker community and online gaming world, the parent company of PaddyPower Betfair is buying the parent company of PokerStars.
The UK-based gambling company, which became Flutter Entertainment just a few months ago, will become one of the strongest names in online betting. By revenue, it will be the largest one.
The all-share deal puts the new entity’s value in the billions range, as combined revenues of the two companies would have been £3.8 billion in 2018.
That’s a big deal.
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Announcements
On the morning of October 2, the business and gambling worlds were buzzing – should we say aflutter? – with the news. Flutter agreed to buy The Stars Group to create the “largest online betting operator in the world by revenue.”
The combined values of the two companies at the closing price of shares the night before the announcement was £9.8 billion. The deal will create £140 million per year of “cost synergies” before tax.
When the deal is completed, Flutter shareholders will own 54.64% of the newly-combined company, and The Stars Group shareholders will hold the other 45.36%.
Peter Jackson of Flutter will become the chief executive officer of the combined company, and current Stars CEO Rafi Ashkenazi will become the chief operating officer of the new group. Jonathan Hill, the CFO of Flutter, will assume that role for the combined company.
Jackson noted, “(The deal) will give us a much bigger platform to operate from. When you are very small in a market, you don’t have anything that differentiates you and you become a bit of a commodity player.”
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Ashkenazi said, “This exciting combination will allow us to enhance and accelerate our existing strategy.” He also said Flutter will accentuate the company’s strengths and “position us strongly for the future in this rapidly evolving industry.”
The combination will use the strengths of both companies. Flutter hopes to gain a better foothold in markets outside of Europe, Australia, and the United States, as The Stars Group currently outweighs Flutter’s influence by six times. Together, they will have approximately 13 million customers in more than 100 betting markets.
The deal is expected to close in the second or third quarter of 2020.
https://twitter.com/FlutterPLC/status/1179318420573216769?s=20
Initial Stock Reactions
Flutter saw an immediate and positive reaction in the stock market.
The US Stock Exchange saw Flutter (PDYDY) close on October 1 at $46.75 and open on October 2 at $50.62. Its high mark for the day was $50.69. The increase on the first day of the news was 8.3%.
The Stars Group traded on Nasdaq, closing on October 1 at $15.31 and opening today at $20.20. It closed at $19.91 for a total gain of 30.05% on the day.
Analyst Reactions
The Financial Times spoke with Michael Mitchell, an analyst at stockbroker Davy, about the acquisition. “Our view is that (the US) will be a highly concentrated market with only three or four players at that top table. Flutter now owns two of those top four.” He referred to FanDuel and The Stars Group, with the other leaders being Bet365 and DraftKings.
Mitchell also expects that this takeover will prompt other companies to consider consolidation as well.
FT also spoke to Morgan Stanley analysts, who warned that the deal could face scrutiny because of the overwhelming pieces of the UK and Australia markets that the new company will own.
Gambling Insider spoke with RB Capital cofounder Julian Buhagiar, who said that the merger will be a slow one due to regulatory and legislative approvals and then the merging of the large entities themselves. It will also be one that disrupts the gambling industry for years to come.
Buhagiar also said the estimated cost savings are “aspirational at best” since both companies trade at lower profit margins than they should.
Others were more positive, such as Olivetree analysts. “The market will love this transaction,” they said in a statement. “Transactions such as this make terrific sense for all parties – especially given the potential for increased exposure to the developing US market.”
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Relationship Sparked Last Year
It appears that the two companies first began discussing the possibilities of a merger/takeover in 2018. Jackson referred to it as a “brief flirtation.” Talks then started again this summer and progressed quickly.
Last year was a busy one for both companies with other business.
The Stars Group bought Sky Betting & Gaming out of the UK for £3.4 billion. The deal was completed in early July 2018.
PaddyPower and Betfair actually merged in 2016, but it wasn’t until March 2019 that the combined companies rebranded as Flutter Entertainment. But in 2018, PaddyPower Betfair bought FanDuel, one of the leading daily fantasy sports operators in the US market, for $158 million.
With those purchases in their pockets, The Stars Group and Flutter talked this summer and decided to proceed with acquisition talks.
They are now engaged.
What About Poker?
For the past several years, online poker has been a shrinking priority for The Stars Group. The focus has been on sports betting, with online casino gaming as a close second.
Within the past few weeks, The Stars Group began restructuring. There were layoff plans at the Isle of Man and Malta offices. The moves were in line with its pursuit of “operational initiatives,” “cost-optimization opportunities,” and in line with its “global growth strategy.”
Flutter brings virtually no online poker strengths to the table, while The Stars Group still garners more than 30% of its revenue from online poker.
As a combined company, as they currently stand, poker will comprise less than 20% of the new company’s business, while online sports betting will near the 50% mark.
Currently, the future of online poker under the merged companies is unknown.
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