SBJ/June 5-11, 2017/Finance

FanDuel: Merger has risks

Document cites hurdles to DraftKings agreement

The proposed FanDuel-DraftKings merger, designed by the companies to rejuvenate growth and become more efficient in the previously high-flying business of daily fantasy sports, faces plenty of hurdles even if approved by regulators, FanDuel acknowledged to its investors.

According to a merger document sent this year to FanDuel investors and obtained by SportsBusiness Journal, the company cited “numerous challenges” associated with the merger and integration of the two companies, and that “there can be no guarantee the combined group will become profitable in the future.”

The document tells investors about the risks involved with the deal and the large amount of work still required to grow the business. It highlights the still-delicate nature of daily fantasy since the industry began to face heavy government and legal scrutiny in late 2015.

“The synergies anticipated with this transaction may not be achieved as anticipated, or at all,” the document reads.

DraftKings CEO Jason Robins and FanDuel CEO Nigel Eccles at DraftKings’ Boston headquarters. The merger was announced in November.
Photo by: GETTY IMAGES


Outlining risks to investors is not uncommon in merger documents. But discussions toward a FanDuel-DraftKings merger began in 2015 and grew serious early last year, contrary to public statements from both companies at the time, “as the two groups began to face mounting legal challenges, regulatory hurdles and related cash constraints,” the document said. The deal, described by the companies as a “merger of equals,” was announced in November.

FanDuel said in the document that it incurred a fiscal loss of $59 million in the period of January-October 2016 on $91 million in revenue. Despite the fiscal issues and a marked slowdown in the daily fantasy market last year, FanDuel carried an estimated $1.2 billion value at the time of the document’s issuance in January.

The two companies have been largely silent publicly on the specific details of the planned integration, with the exception that DraftKings co-founder and chief executive Jason Robins will be chief executive of the combined company, and FanDuel chief executive and co-founder Nigel Eccles will be chairman.

First Look podcast, with FanDuel/DraftKings discussion at the 19:20 mark:

The deal is being reviewed by the Federal Trade Commission. If it goes through, Eccles will be eligible for a retention bonus of $6 million, half of which would be paid 90 days after closing of the deal, a quarter one year after closing, and the final quarter also a year later subject to certain performance targets, the document states.

The merger document details a nine-person board of directors that will include DraftKings investors Ryan Moore of Atlas Ventures, Hany Nada of GGV Capital and John Salter of the Raine Group; FanDuel investors Ted Oberwager of Kohlberg Kravis Roberts & Co., Michael LaSalle of Shamrock Capital Advisors, and Andrin Bachmann of Piton Capital; as well as Robins, Eccles and an independent director to be named. Prior investors in the daily fantasy companies, such as the NBA, Comcast Ventures and 21st Century Fox America, will gain indefinite board observer rights.

FanDuel/DraftKings timeline

July 2009
Hubdub, a web-based predication market, launches FanDuel.

April 2012
DraftKings launches with a one-on-one baseball competition on Major League Baseball’s opening day.

April 2013
MLB invests an undisclosed amount in DraftKings, becoming the first league to invest in a daily fantasy sports company.

November 2014
DraftKings begins a three-year stint as the official daily fantasy site of the NHL; FanDuel becomes the exclusive fantasy partner of the NBA, exchanging an undisclosed equity amount in return.

May 2015
NASCAR and DraftKings agree to an exclusive, three-year partnership.

June 2015
DraftKings completes an exclusive multimillion-dollar deal to advertise across ESPN platforms.

October 2015
After a DraftKings employee wins $350,000 on FanDuel, both companies release statements in response to insider trading concerns.
Nevada bans daily fantasy, prompting 11 other states to follow suit within the next year.

February 2016
Signing English soccer clubs Arsenal, Liverpool and Watford as official partners, Draft-Kings starts an international expansion. FanDuel would make its U.K. debut a few months later.
DraftKings and FanDuel prompt a major daily fantasy lobbying push in 34 states. Virginia becomes the first state to set a legal structure for daily fantasy; New York later uses this approach to reverse its previous ban.

March 2016
DraftKings and FanDuel suspend college sports contests amid pressure from the NCAA.

November 2016
Following months of rumors and negotiations, FanDuel and DraftKings officially announce plans to merge, which would result in a combined market share of 95 percent of the daily fantasy sports market.
                   
                                — Compiled by Mark Calcagno
The companies’ goal to create as equal a merger as possible also applies to the equity structure of the deal. Each company’s stock, which was previously structured in a variety of classes and preferences, will be pooled into a single class of shareholder in which prior FanDuel shareholders will have half of the equity and voting rights in the new entity and DraftKings shareholders will have the other half. The combined company will be co-headquartered in Boston and New York, the current U.S. headquarters of the two companies. FanDuel traces its roots to Scotland and is still registered there, so British law required the document to be filed.

Other operational details, such as personnel, branding or integration of both companies’ games, were not outlined in the document. Sources familiar with both companies said many of those issues are unsettled, and will remain so until after the merger receives FTC approval. But industry chatter has been focused of late on DraftKings likely serving as the primary technical foundation for the combined company’s games, and the new company name combining elements of both FanDuel and DraftKings.

The combined company intends to create an integration committee that will exist for six months following the deal closing and advise the new board on proposed steps.

The merger could be closed by the third quarter of this year, pending FTC approval. The deal has raised concerns about potential antitrust compliance given that the two companies will control about 95 percent of the daily fantasy market.

But FanDuel and DraftKings are positioning the deal as a means to compete in the broader and still growing fantasy sports market that includes season-long contests from major providers such as ESPN and Yahoo. And several industry observers said they still expect the deal to be completed, despite six months of relative silence on the matter.

“Our sense remains that it will get approved and close,” said Adam Krejcik, principal of gaming research firm Eilers & Krejcik.

Both FanDuel and DraftKings declined to comment on the document, or the progress toward receiving FTC approval for the merger. Earlier this year, Eccles told Bloomberg that the deal was “progressing as we expected.”

Though not operating under the same level of heightened public scrutiny as a year ago, daily fantasy remains a tenuous legal issue in many parts of the country. Bills that would legalize and regulate daily fantasy are still pending in several states, and DraftKings and FanDuel are fighting negative opinions from attorneys general in key, populous states such as Texas and Illinois.

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