LONDON (Reuters Breakingviews) - Paying a 38% premium is usually a sure-fire way to destroy value. Not so with bookmaker Flutter Entertainment, which is offering $6.1 billion in shares to buy Canadian peer Stars Group. Cost savings alone almost justify the generous price, while post-deal revenue boosters look credible.
The Dublin-based parent of Paddy Power and Betfair, and the Toronto-based owner of PokerStars on Wednesday announced plans to create a $13.4 billion gambling giant. Stars Group investors will get 0.2253 Flutter shares for each of their own. Using Tuesday’s closing price, that’s worth about 38% more than its undisturbed $4.4 billion value - a punchy offer since the global average M&A premium last year for media and entertainment deals was 22%, according to Statista.
So why did Flutter investors bid up its stock by 15% on Wednesday morning? Start with cost savings, which Flutter Chief Executive Peter Jackson pegs at $171 million annually. Deduct tax at Flutter’s 17% rate, using Refinitiv data. Then capitalise at 10 times, and subtract integration costs, estimated by Jackson at $221 million. The savings would then have a $1.2 billion net present value, compared with the $1.7 billion premium on offer.
Jackson could make up the near-$500 million difference with extra sales. That would equate to about $54 million of additional operating profit, using Breakingviews estimates, or about $170 million of revenue on Stars Group’s margin. That’s plausible, since combined sales are $4.6 billion, Flutter says. It follows that revenue synergies would have to boost the top line by an achievable 4%, in addition to the stated cost savings, to justify Jackson’s premium. He could start by cross-selling Stars Group’s poker and other online gambling products to his own sports punters – and vice versa. There’s also extra revenue on offer from getting Flutter’s U.S. fantasy-sports business FanDuel to work more closely with Stars Group’s partner Fox Bet, which is well-placed to make money from legalised sports betting in America since it is backed by Fox Sports, with 100 million viewers.
As with all deals, integrating workforces and back-office systems represents a risk. UK antitrust regulators might also object to Stars Group’s Sky Bet teaming up with Paddy Power and Betfair. Still, from Jackson’s point of view it’s definitely worth a flutter.
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.