Market Watch: Flutter, Stars and marketing the industry's biggest merger

What will become of Flutter and Stars? When the hurlyburly’s done, when the battle’s lost and won; what then becomes of the new behemoth? Well, hedge funds have already taken a view; and it’s mostly a short one.

Since the announcement, at least 5% of Flutter’s public stock has been shorted; and likely to be significantly higher across the longer tail incorporating other funds, given the 0.5% cap disclosure restriction for every single position. To put this into perspective, at least £300m of known smart money is estimating that the valuation of the business will be worth less than what it is valued now; merger or no merger.

No surprises

It’s important to (re)iterate that this should not have come as a surprise; at least not to anyone taking more than a passing look at the disclosed numbers. For starters, the stated annual savings of £140m was always going to be a tall order and a much longer-term objective, so shareholders effectively would have to wait longer before receiving any additional dividends per share as a result of these new ‘synergies’.

Furthermore, there’s a widely held view that regulation – both at home and overseas in each respective licensed territory – will have significant effects on the merger as well as the individual entities themselves. Assuming the UK regulator clears a transaction that will effectively own 40% of the market – and that’s a big ask in itself – the merger then needs to get past the Australian regulator.

Thus, a month on from the news, it’s probably a good time to ask what could have been done differently. When it comes to marketing the merger, two of the industry’s titans seem to have fallen short on the first obstacle. There are plenty of benefits from the deal, but as we’re currently seeing on the open markets, the benefits clearly aren’t being communicated strongly enough.

As part of the merger, Fox Bet (the Stars Group) will have the right to acquire 18.5% of FanDuel. It is this powerful branding combination the market should take note of most. Through its partnership with Fox Bet, FanDuel will essentially have free access to an incredible advertising channel, as Fox Sports gradually rolls out odds and gaming coverage as part of its broadcasts.

Flutter’s investor presentation on the merger suggests Fox Sports offers over 100 million viewers for FanDuel to advertise to. Aggregated, Fox Bet is set to access eight million customers across 41 states, close to a quarter of a million of which are sports bettors (which is likely to climb if fantasy players increasingly take to sports wagering, which is expected).

However, very little of this is resonating across the investment world as part of the marketing message, and any potential boost in Flutter’s valuation (given their relatively low debt ratio) can be easily unwound once hedge funds declare their short positions, leaving the consortium in a dangerously over-leveraged position.

Could this have been done any differently? Perhaps, though in this case, a leaf needs to be taken from the venture capital, not hedge fund, marketing bible. Firstly, ahead of any mergers, communicating a localised joint venture should have been the first communique to explore.

This has been successfully demonstrated elsewhere and is not dissimilar to the tried and tested adage of first dating. Why not trial the market with a joint venture and a staggered comms campaign and see if there’s mutual interest, instead of immediately announcing big wedding plans?

Next, when – and only when – there’s a clear strategy in place to appease the regulators, a more detailed roll-out and financial plan is published, showing exactly how, when (and how much) savings will be derived from which territories. That way prospective future shareholders are incentivised by a longer investment strategy, and equally can hold the executives to account if they fail to deliver down the line. It’s a much better way to market to value investors like us who see an investment horizon beyond the next 5-7 years.

A slow start

So, in summary, not a great start – but not surprising either. Not all is lost, however; the group can still pull this merger through if it markets a staged, well-documented long-term strategy. But, as can be seen by the short positions – time, and patience, is wearing thin.

The next move by the Flutter/Stars consortium will need to be calculated – and quick. For a start it would be advisable to have an overhaul of the marketing and comms departments to ensure they provide a concerted message as the clear benefits of this merger – and in turn the incentive for long positions to be taken. Venture capital has always thrived on playing the long game, and clear and precise messaging have been instrumental to encouraging investors to be patient and ride out the short-term storms.

To be fair to both parties; a strong reassuring long-term narrative that that stops investors becoming jittery in such turbulent times is a challenge in itself. Then again, the task of merging into a gaming company with an £11bn market capital and combined pro forma revenue of at least £3.8bn was never going to be an easy task.

Julian Buhagiar is an investor, CEO & board director to multiple ventures in gaming, fintech & media markets. He has lead investments, M&As and exits to date in excess of $370m.