After months of speculation, it’s real: DraftKings and FanDuel, the two market-share leaders in the ‘daily’ fantasy sports industry, have announced they will seek to merge into one company.
The two companies, which offer fantasy sports contests with daily (or weekly) drafts as a pick-up-and-play alternative to traditional season-long fantasy football, will continue to operate separately, and keep their names, until the merger is approved by regulators. That will take many months—perhaps even a full year.
The companies themselves, in a press release on Friday, said they expect the transaction to close “in the second half of 2017.”
That means for now, nothing will change for customers; DraftKings and FanDuel will still be separate companies with separate apps, separate CEOs, and separate headquarters.
After the merge (if regulators let it go through), the company will be co-headquartered in Boston and New York. DraftKings co-founder and CEO Jason Robins will be CEO, while FanDuel co-founder and CEO Nigel Eccles will be chairman of the board. Each company’s investors will get three board seats, so the overall board will be comprised of four DraftKings seats (including Robins), four FanDuel seats (including Eccles), and one independent seat.
The companies aren’t sharing what the name of the eventual combined company will be.
The marriage is a “strategic merger of equals,” the companies say in a press release, but they are not disclosing the valuation of the eventual merged company. The companies have raised over $1 billion in combined venture funding.
DraftKings and FanDuel do not share user numbers, but reportedly brought in $3 billion in entry fees last year. They are not yet profitable. Merging, the companies say, “will help the combined company accelerate its path to profitability.”
Legal costs led rivals to merge
The past year has been a difficult one for these two privately held “unicorn” tech companies. At the outset of the 2015 NFL season, they spent more than $200 million combined just on television advertising. They also blasted radio stations with ads, papered bus stations with ads, and signed marketing deals to put signage in sports stadiums. The NBA took an ownership stake in FanDuel, MLB took an ownership stake in DraftKings, and 28 of the 32 NFL teams signed a marketing partnership with one company or the other, though the NFL itself did not invest.
DraftKings and FanDuel were flying high at the top of an exploding new business segment.
Then, either due to the advertising flood or to a scandal involving a DraftKings employee winning $350,000 in a FanDuel contest, lawmakers took aim at daily fantasy sports.
In November 2015, New York Attorney General Eric Schneiderman sent letters to the two companies asking them to cease and desist from taking paid entries from users in New York State.
Schneiderman’s effort launched a legal war that lasted for nine months and although it ended with the New York legislature passing a bill to legalize and protect fantasy sports, it also depleted the two companies’ coffers, sources say, to the point where a merger, always a possibility, became a necessity.
Jason Robins says the merger will “help advance our goal of building a transformational global sports entertainment platform,” and that the combined entity will “be able to accelerate the pace of innovation and bring a richer experience to our customers than we ever could have done separately.” Nigel Eccles says merging will, “create a business that can offer a greater variety of offerings” to users, and will help attract season-long fantasy players who still have not tried the daily variety of fantasy.
Last month, the companies settled a lingering false advertising claim with Schneiderman for $6 million each.
Under the spotlight for another year
After the aggressive wave of advertising came months and months of negative news headlines as more and more state officials came out against or in support of daily fantasy sports. You could not avoid hearing about these two companies, even if you were not a sports fan. Many people became very tired of hearing the names DraftKings and FanDuel.
In the year ahead, it’s unlikely that people will stop hearing them.
The companies will undergo the process of merger review by the two relevant federal agencies, the Federal Trade Commission (FTC) and Department of Justice (DOJ). After the signing of New York’s fantasy sports bill in August by New York Gov. Andrew Cuomo, the companies were able to breathe a sigh of relief. They also significantly toned down their advertising for the NFL season compared to last year.
The merger review process is not public, but as it goes on, DraftKings and FanDuel will be back under the glare of the news spotlight. How will the companies handle that?
“We’re always going to be high profile. That’s just how we are, that’s how we roll, we’re a consumer-facing business,” says an employee of one of the companies. “Yes, there was a great deal of regulatory hubbub. I think what you’ve seen in the last six months, though, is a real growth in sophistication of how we deal with that.”
Merging also makes it more likely that the combined company will plan to go public. That would provide an exit to their many investors.
FanDuel’s investors include KKR, Google Capital, Time Warner, Comcast Ventures, and the NBA. DraftKings has MLB Ventures, MLS, the NHL, 21st Century Fox, and The Kraft Group, among others. (Yes: New England Patriots owner Bob Kraft could very well end up on the board of the combined company.)
But first, of course, they’ll have to get their merger through.
Will the merger get approved by antitrust regulators?
Together, DraftKings and FanDuel own an estimated 96% of the “daily” fantasy sports market. Because of that, their planned merger will very likely raise the flags of regulators.
The DOJ and FTC have traditionally split merger reviews based on industries in which each agency has an expertise. Because the daily fantasy sports market is so new, it’s difficult to predict which agency will handle the review of this merger.
Whichever agency it is, attorney Marc Edelman, who has consulted for fantasy sports companies and is a professor at the Zicklin School of Business at Baruch College in New York, says the merger will face tough scrutiny because the Herfindahl-Hirschman Index, which measures a company’s market concentration to identify a possible monopoly, is “through the roof” here.
“The combined share of the merging companies in their market is nearly 100%,” Edelman says. “This is far above the level that the horizontal guidelines indicate is problematic.”
Under the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, the agencies have a 30-day window after the companies file their merger papers to request more information. This is called a “second request” and Edelman suspects that DraftKings and FanDuel are almost guaranteed to at least receive a second request.
That process involves “discovery” that can include interviewing employees. During the process, the companies cannot operate as the merged entity. It typically takes many months, and due to the timing here it will surely last into the new presidential administration.
Edelman points out that the merger will be an “interesting test” of the Trump administration’s antitrust policy. “If you look at merger policy over the past few years, there is an ongoing movement toward allowing greater consolidation,” he acknowledges. “Nevertheless, the one type of merger that still regularly is rejected is the merger of any market’s No. 1 and No. 2 players. At this exact moment in the fantasy sports market, this is nearly comparable to a merger in the cola industry of Coca-Cola and PepsiCo.”
DraftKings and FanDuel will argue it is nothing like that, for two key reasons.
First, legal experts say, they will likely make the case that the market they are in is not so narrow as just “daily” fantasy sports, but the much broader market of all fantasy sports. The fact that DraftKings and FanDuel (as well as Yahoo Daily Fantasy) have recently added new features that place “daily” fantasy into a season-long setting helps that argument; it allows them to make the case that they have shown they’re already inching beyond just “daily” fantasy sports.
Second, the biggest powers in more traditional “season-long” fantasy (think ESPN), which is still a much larger business, are likely to enter the “daily” market once the regulatory dust settles, DraftKings and FanDuel will argue. Yahoo, a large publicly traded tech company that has offered season-long fantasy for decades (and parent of Yahoo Finance), is already in the daily market (though it is a distant No. 3 by market share). This would help bolster their argument that Yahoo is likely to expand its offering and that eventually ESPN could enter as well.
ESPN, which was once airing so many DraftKings and FanDuel ads that some were showing back-to-back, this year got out of an exclusive, long-term marketing deal with DraftKings. That might suggest that ESPN actually wouldn’t want to launch a daily fantasy sports product. But in legal terms, that doesn’t matter. All that matters for the merger is whether it’s plausible that giants like ESPN might want to enter the market, as it helps the argument that the market is much bigger than just daily, and thus that a combined DraftKings and FanDuel would not have an unfair monopoly.
Still not operating in 10 (or 11) states
The combined company will also continue to fight legal battles in states where lawmakers have been unfriendly.
DraftKings currently does not do business in 10 states: Alabama; Arizona; Delaware; Hawaii; Idaho; Iowa; Louisiana; Montana; Nevada; and Washington. In some cases that’s because the law makes it clear daily fantasy sports contests are illegal gambling, while in others the law is vague but unfriendly enough that DraftKings chooses to stay out.
FanDuel does not operate in the same 10 states, as well as Texas, where Attorney General Ken Paxton stated his opinion that DFS contests are illegal gambling under state law.