Flutter Entertainment Plc (OTC:PDYPY) made waves in the sports betting universe on Dec. 3, saying it’s paying $4.175 billion to Fastball Holdings LLC to purchase 37.2 percent of FanDuel, a move that ups the Irish company’s stake in the US sportsbook operator to 95 percent from 57.8 percent.
Investors cheered the announcement, sending Flutter’s US-listed shares on a major ride higher, helping the stock to a weekly gain of 10 percent. Some of the good news may be attributable to the fact that the Dublin-based gaming company isn’t issuing debt to fund the deal, meaning its credit rating is unlikely to be damaged at the expense of its ambitious US expansion plans.
The Fastball buyout is being fund with $2.088 billion in cash Flutter previously held and another $1.470 billion raised via the sale of 11.7 million shares of stock. Some of the financing was procured by way of Fox Corp. (NASDAQ:FOXA), which has been avid buyer of Flutter equity this year.
We expect that Flutter’s liquidity will remain strong after the transaction, underpinned by a largely undrawn $605.58 million revolving credit facility,” said analysts from Fitch Ratings in a Friday note. “The majority-equity funding structure for the deal confirms Flutter’s conservative financial policy, as expected by Fitch which, in turn, supports the company’s investment-grade rating.”
The ratings agency grades Flutter’s credit BBB- with a negative outlook. BBB- is the lowest investment-grade rating, but any of the three BBB grades imply low default risk.
Keeping Leverage in Check
Not only does buying out Fastball boost Flutter’s ownership of FanDuel, giving the parent company a bigger piece of revenue and profits in the fast-growing US markets, the way the deal is being financed keeps leverage low.
The operator said leverage at the end of this year will be 3x adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), positioning it to meet its longer-term, stated objective range of 1x to 2x. Had the company opted to sell bonds to purchase Fastball’s FanDuel stake, it would have added a longer-ranging fixed cost, including interest expenses, to its balance sheet.
“We forecast the envisaged acquisition would translate into limited changes to Flutter’s credit metrics, adding less than 0.5x to funds from operations (FFO) lease adjusted net leverage,” according to Fitch. “We still forecast FFO adjusted net leverage to be below 3.5x by financial year to December 2022, as we do not envisage additional external financing requirements.”
Following completion of its $12.2 billion takeover of The Stars Group (TSG) earlier this year, the transaction creating the world’s largest online gaming company, Flutter is prioritizing leverage reduction.
Waiting on Profitability
Flutter may prove prescient for not tapping credit markets to buyout Fastball for another reason: FanDuel, like rival DraftKings, isn’t yet profitable.
In fact, analysts’ biggest knocks on online sportsbook operators are lack of profitability and free spending on customer acquisition. And like its most direct competitor, FanDuel is likely on a multi-year timeline to stop losing money.
“We assume FanDuel will remain a negative contributor to consolidated operating EBITDA and FFO over the next three years, due to the high development costs of this fast-growing activity,” note the Fitch analysts. “We continue to expect Flutter to maintain its prudent financial policy and commitment to reduce leverage after its peak triggered by the Stars Group acquisition completed in July 2020.”
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