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FOX, FanDuel Ruling Makes Things Interesting

FanDuel is the undisputed king in American online sports betting at the moment, an industry that has seen revenues through the end of August up nearly 70% year-over-year with almost $4 billion so far.

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For most of us, Friday is the end of the workweek, the portal into a weekend full of football and relaxing. It’s a day where many like to relax and gear down after a long week. It was anything but that for the business side of the sports betting world this past Friday. After more than a year of fighting in court, FOX and FanDuel received a ruling in their lawsuit regarding the valuation of the gambling behemoth and how much FOX would need to pay in order to execute their option to purchase an 18.6% stake in the sports book.

A New York arbitrator ruled that FOX would need to pay based on a valuation of $20 billion, versus the $11.2 billion valuation used when Flutter increased their holding of the company to nearly 95% via a 37.% stake increase in December of 2021. The ruling was also down from the $30-35 billion range that some analysts believed would be levied, which was a bit of a win for FOX.

While it will likely have no bearing on the general sports betting public, the ruling is causing quite a few ripples in the financial community–and could have a seismic long-term impact on how sports books and companies like FOX and ESPN might partner.

FanDuel is the undisputed king in American online sports betting at the moment, an industry that has seen revenues through the end of August up nearly 70% year-over-year with almost $4 billion so far. New York is by far the largest betting market in America, and the company has claimed nearly half of the Empire State’s $1.06 billion in gross revenue since launching on January 8 of this year.

Flutter stated in June that they’ve now earned more than 51% of the entire US sports betting market, up from 40% market share at the turn of the year. Now, FOX would need to pay upwards of $4 billion based on the five percent annual increase of the price per the arbitrator’s ruling.

FOX has a ten-year option to purchase their 18.6% stake in FanDuel, which means were they to wait until 2030–the final year of the option–to make their purchase, it would cost more than $6 billion to do so. Whether they will do so, either now, then, or anytime in-between, is what makes things quite interesting–and not just for FOX and FanDuel.

First of all, FanDuel had plans to go public with an IPO to cash in on the booming sports betting industry. However, those plans are on hold at the moment with varying explanations as to why. While FOX claims the ruling on Friday means they get final say on any IPO launch, Flutter claims they are the ones holding off until a separate ruling is issued on the matter in either the first or second quarter of 2023.

Secondly, there is the matter of FOX Bet, a joint venture which FOX sold to Flutter with an option to purchase 50% of before August of 2023. Part of FOX’s lawsuit claimed that Flutter was intentionally tanking FOX Bet in order to keep from harming FanDuel’s market share. FOX Bet, which has less than 1% market share, was deemed by the arbitrator to have been provided “commercially reasonable resources” per Flutter’s statement on Friday.

Here’s where things get interesting. A few weeks ago, FOX and News Corp — both owned by Rupert Murdoch, and formerly the same entity before splitting in 2013 — notified SEC regulators that they are exploring a potential re-merging of companies. This is in large part due to Murdoch wanting to capitalize on the sports betting space, with plans to invest the savings of a merger into that area. Part of this would hinge on them licensing the FOX Bet brand to another venture that would utilize it in Australia, where Murdoch has many business interests.

Should FOX choose to not purchase their 50% stake before next August — which would also include 50% ownership of the operation of FOX’s free Super 6 game and PokerStars US — then it would allow either FOX or Flutter to shut down the FOX Bet operations at any time. This would return the FOX Bet branding back to FOX, while Flutter would retain the other two enterprises.

Such a merger would also raise the market valuation of the joint company to the range of $25 to $30 billion, which could help facilitate triggering the 18.6% stake option of FanDuel. The question is, would they still want to do that–or would they potentially seek to sell off that stake to someone else?

This decision has ramifications for two other entities as well, namely DraftKings and ESPN. On his third quarter earnings call earlier in the day on Friday, DraftKings CEO Jason Robins was asked about a partnership with ESPN, after reports came out in October stating the two companies were exploring a business deal.

While Robins would not mention ESPN by name and somewhat sidestepped the question, he did discuss what it would take for DraftKings to enter into a partnership with any media entity. He stressed that they would need to realize a profit from new customers within three years, citing this as a key reason why they had not yet entered into any agreements. DraftKings reported a loss of $1.00 per share last week–down from a $1.35 per share loss a year ago–and stated they hope to break even on earnings before interest, taxes, depreciation, and amortization sometime in 2024.

Reports from last month indicated that DraftKings, who has $1.4 billion cash on their books as of the end of the quarter, would have to pay ESPN $1 billion upfront in addition to a revenue-sharing agreement in order to license together. Those reports contributed to a nosedive of DraftKings stock, with the price dropping from $17.45 two weeks ago to $11.55 on Friday. While it rebounded about half a point on Monday, it’s still trading nearly 75% below where it was almost a year ago.

All of this is important to know, especially considering many analysts believe ESPN has been seeking at least $3 billion in revenue in order to license with a sports book. Many analysts believe that number would have to drop substantially before a deal is done, and Robins’ comments on Friday seem to point to that stance. He stated on the call, “Some of the deals we had to pass on, in today’s environment would be more rationally priced.”

I’m very interested to see which domino falls first. ESPN is going to partner with someone eventually, and given FanDuel’s contentious relationship with FOX it’s hard to see them making things worse by partnering with ESPN–and given their control of the market, they have no need to do so.

That makes DraftKings the most logical choice. No other book can really afford to pay what ESPN is seeking, and the partnership would give DraftKings a real shot at gaining ground on FanDuel.

Should DraftKings and ESPN partner before FOX triggers their option, I’m not sure how they would react. Would they deem it a less profitable situation if DraftKings cuts into their market share? Or would they yet again attempt to keep up with The Worldwide Leader and hope that FanDuel’s popularity would help increase their profile? And would they need the FOX/News Corp merger to take place before they could do so?

I don’t know how this is going to end up playing out. I don’t know what decisions will be made by FOX, or when they’ll make them. But as a gambling man, I would bet on this situation getting even messier.

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