Disagreement about 18.6% equity price

Fox Corporation has filed a confidential lawsuit against Flutter Entertainment in the Judicial Arbitration and Mediations Services in New York. The arbitration claim, filed last week, relates to Fox’s option to purchase an 18.6% stake in the FanDuel Group.

Flutter believes this equity is now worth much more

Fox wants to purchase the equity stake at the same valuation that FanDuel majority owner Flutter bought an additional stake in December 2020. That month, the sportsbook holding company acquired a further 37.2% share in FanDuel from FastBall for $4.18bn. The deal valued the sportsbook at $11.2bn. Flutter believes this equity is now worth much more.

Flutter is seeking fair market value when Fox exercises its option in July 2021 and has committed to “vigorously defend” this position. A statement on Wednesday labeled the legal action as being “without merit”. Dismissing Fox’s stance about the basis of the valuation, Flutter said: “It would represent a windfall to FOX compared to the fair market valuation as of July 2021, to which the parties had previously agreed.”

Conflicting beliefs

With Flutter reportedly contemplating a FanDuel IPO, the public offering could determine the FanDuel stake price it is seeking from Fox. If no IPO goes ahead, the gambling company wants banks to decide on the fair value of FanDuel.

Flutter chief executive Peter Jackson had previously stated in March that Fox would need to pay fair market value when exercising its FanDuel option in July. He specifically mentioned that the price would be different from that negotiated with Fastball.

Fox holds that Flutter created the fair market value clause after the initial contract signing. If the current market value is the basis for Fox’s stake option, then the media giant believes that this approach nullifies the option, especially if FanDuel holds an IPO before July 2021. The fair market value of FanDuel would be the trading price on the open market at that given moment in time, meaning the option would be of no real value to Fox.

Two intertwined companies

Another issue that complicates matters is how Flutter-owned The Stars Group operates the Fox Bet brand as part of its US business. Fox Bet is a direct competitor to FanDuel.

media company reportedly wants Flutter to include The Stars Group as part of a FanDuel IPO

Fox also holds a ten-year option to purchase half of The Stars Group’s business in the US. The media company reportedly wants Flutter to include The Stars Group as part of a FanDuel IPO by merging these entities. According to CNBC, the two companies have also considered eliminating Fox Bet entirely.

Fox originally got the option to buy 18.6% of FanDuel following Flutter’s merger with The Stars Group last year. Fox owned a 4.99% stake in The Stars Group before the merger, as well as having the ten-year option to purchase half of its US business. This was off the back of a 25-year partnership agreement between the two parties that led to the creation of Fox Bet. After Flutter purchased The Stars Group, Fox got a 2.6% stake in Flutter, as well as getting the FanDuel option.

Big business in the US

Sports betting is big business in the United States, and more than two dozen states have legalized the activity to date. More states are to push through legislation in the next few years to legalize sports betting and get in on some of the action. In 2020, gross gaming revenue from US sports betting was reportedly around the $30bn mark.

Many operators are trying to get their own piece of the action, resulting in the sports betting space becoming very competitive. Both FanDuel and DraftKings have performed strongly to date in terms of capturing market share. The two operators were able to build on their existing daily fantasy sports offerings to quickly gain sports betting customers.  

Flutter originally bought a majority stake in FanDuel shortly after the federal ban on sports betting came to an end in May 2018. This original purchase gave Flutter the option to increase its stake over time. Currently, Flutter owns 95% of FanDuel, while Boyd Gaming owns the remaining 5% stake.