Arbitration has concluded for Fox Corporation and Flutter Entertainment, on two out of three issues, anyway. One aspect of that decision could mean the future disappearance of yet another US online gambling brand.
Fox initiated arbitration in April 2021 because of a difference in how the two companies interpreted a contractual clause. Flutter believed it had granted Fox the option to buy an 18.5% stake in FanDuel – which Flutter owns – for a current fair market value. Fox understood that it would be paying the same price Flutter had when buying out another company, Fastball, in December 2020.
In the end, neither company got exactly what it wanted. However, each is presenting the decision as a win to its investors. At the same time, the future doesn’t look promising for their joint venture, Fox Bet.
The Valuation Ruling
Judicial Arbitration and Mediation Services in New York agreed with Fox that the arrangement implied a fair market value in December 2020, not one which would depend on the time Fox elected to exercise its option. However, it disagreed that this equated to the price FanDuel had paid.
When Flutter purchased Fastball’s stake and increased its own stake to 95%, it paid an amount that implied a valuation of $11.2 billion. However, the arbitrator pointed out that Fastball had been incentivized to sell and that it was doing so at below a fair market value.
DraftKings, a very similar company to FanDuel, had a valuation of around $20 billion at that time. That has now become the “fair market value” on which Fox’s potential purchase will be calculated. There’s also a compounded annual “value adjustment” of 5%, increasing the effective valuation to a little over $22 billion.
Fox can take its time to decide if it likes that price. It has until December 2030 to exercise the option to buy that 18.5% stake for $4.1 billion, plus 5% per year it waits. Other investments would likely return more than 5%, so it can afford to wait and see how FanDuel performs.
Two Additional Questions, One Answered
Much digital ink has been spilled about that valuation and who it favors. The general consensus seems to be that it’s a win for Flutter, but there’s room for disagreement. Equally interesting, however, are two additional items Fox added to the arbitration after it was underway. One of these is still before the court.
Is the FanDuel IPO Still On?
The open question is whether and with what conditions Flutter can proceed with a FanDuel IPO. That has been an on-again, off-again prospect for over a year. At one time, it was something investors were excited about, and Flutter would have wanted to cash in on that enthusiasm had this business with Fox not derailed things. Now, however, the market sentiment around sports betting has cooled.
The court likely won’t decide on that issue until early next year. Flutter has promised not to proceed with an IPO in the meantime. That likely suits the company fine, as it would be unlikely to fetch the best price in this economic climate in any event.
Has Flutter Been Neglecting Fox Bet?
The second question, which the arbitrator did rule on, concerns Flutter’s investment in Fox Bet.
FanDuel is the US market leader in sports betting and a top-three operator for iGaming and sports betting combined.
Conversely, Fox Bet is foraging for crumbs. This year, its market share for online sports betting revenue has been 1.5% in Pennsylvania and 0.6% in Michigan. (Fox Bet also has a presence in Colorado and New Jersey. However, those states’ revenue reports don’t contain the necessary detail to calculate a market share for Fox Bet as an individual operator.)
Fox claimed that Fox Bet suffered because Flutter had not supplied “commercially reasonable resources” to the joint venture. The court disagreed with that entirely. On that front, at least, Flutter came away the clear winner.
As a result, Fox will have to decide whether it wants to continue with the joint venture in its current state or walk away.
An Awkward Relationship
From the start, things were always going to be weird between Flutter and Fox.
Fox Bet began as a joint venture between Fox Sports and The Stars Group. It predates the latter’s acquisition by Flutter and is not a deal that would have made sense for Flutter to strike itself.
Acquiring PokerStars made sense for Flutter, as it lacked a poker product of its own. The Stars Group also included Sky Betting and Gaming, adding to Flutter’s dominance of the United Kingdom and Ireland. (Flutter began as a merger between Paddy Power and Betfair, two major forces in that market.)
Fox Bet came along for the ride. However, with FanDuel already leading the sports betting market, it would be hard for Flutter to see much value in building a new brand.
The arbitrator has decided that FanDuel doesn’t need to do more than it already has. The ball is now in Fox’s court. To keep the joint venture alive, it must pursue its own sports betting licenses and buy 50% of the company.
If it doesn’t do so, the joint venture will end. Fox Bet, as it exists, will shut down. Flutter will keep the important parts, PokerStars US and the free-to-play sports product Super 6. Fox will have the rights to the Fox Bet brand in the unlikely event it wants to try flying solo.
The timeline for that decision is much shorter than that for the right to buy into FanDuel. Fox has only until August 2023 to make up its mind. And the relationship is strained enough as it is.
The Attrition Phase of the Market
Assuming Fox does decide to walk away from Fox Bet, it would be one in a string of sportsbook shutdowns.
Excitement about US sports betting led to a proliferation of brands between 2018 and 2021. However, margins are tight in sports betting, and the market has grown very crowded. Moreover, the most prominent brands have been spending enormous sums in their battle for market share. It’s an utterly inhospitable environment for newer, smaller brands.
That has led to what might be termed the Great Culling of 2022. Several less-viable brands have decided to throw in the towel this year:
- Penn Entertainment decided to pull TheScore Bet out of the US, focusing on Canada with that brand and Barstool Sportsbook in the US.
- Churchill Downs has decided to retreat to its home turf of race betting, abandoning the sports betting and casino activities of its TwinSpires brand.
- Esports-focused sportsbook Vie.gg shut down before it really got off the ground.
- Fubo Sportsbook shut down, with the parent company deciding to go back to focusing on streaming media.
- Unibet has decided to leave Iowa and limit its US presence to states where online casinos are legal.
Admittedly, some of these had an even smaller presence than Fox Bet currently has. Even so, survival with a 1%-to-2% market share in the sports betting space is hard.
It would not be surprising to see Fox Bet join the list of the fallen next year. And it probably wouldn’t be the last, either.