June 13, 2016

fantasy-sportsDraftKings Inc., among Boston’s most vaunted and valuable tech startups, is reportedly in talks with rival FanDuel Inc. about a merger that would create a single dominant player in the multibillion-dollar daily fantasy sports business.

The pressure to combine comes primarily from the investors behind DraftKings and FanDuel, who argue the two privately-held companies offer nearly identical contests and face similar legal and regulatory challenges, Bloomberg and Reuters news services reported Monday, citing anonymous sources.

No deal has yet been agreed to by the companies, Bloomberg reported, adding that talks could still fall apart.

The companies said they would not comment on speculation.

But others in the daily fantasy sport industry said a merger would make good financial sense — and for reasons beyond the usual efficiencies that make corporate tie-ups attractive.

For one thing, they said, each company has spent hundreds of millions of dollars in an advertising race, and each has kept entry fees modest while ratcheting up prize payouts and bonuses for new users who sign up.

Meanwhile, the companies’ revenues are shrinking as more states ban their contests on the grounds that the games violate gambling laws. And costs — including a joint nationwide lobbying blitz, legal expenses, and new fees as more states adopt regulations on fantasy sports — are rising.

“The revenue isn’t coming in like it used to. It’s a smaller pie and it’s getting more and more expensive to continue in this space,” said David Klein, an attorney who represents fantasy sports companies, but not FanDuel or DraftKings. “There’s also very little that differentiates them. So with all these headwinds, it makes sense to merge if they can.”

A combined company could drastically reduce its advertising outlay, Klein said, and would enjoy far more flexibility when setting payouts and entry fees.

Though both are private companies and don’t publicly release financial information, FanDuel was the bigger of the two by the end of 2015, according to Eilers & Krejcik Gaming LLC. The research firm estimated FanDuel had about $174 million in revenue last year, compared to about $106 million for DraftKings.

But both companies have seen their valuations drop precipitously amid multiple investigations and legal challenges from federal and state officials.

The firms have stopped accepting entries from several states, most notably New York, where Attorney General Eric Schneiderman mounted an aggressive campaign against them last year.

DraftKings and FanDuel have argued that their contests, in which fans assemble imaginary rosters of athletes and win cash based on how well those athletes perform in real-life, are legal games of skill.

They’ve also worked together on a lobbying campaign to get state legislatures to pass measures explicitly legalizing fantasy sports contests for cash. In Massachusetts, restrictions on the games put forth by Attorney General Maura Healey were recently finalized.

Klein said the two companies’ close cooperation in their fight for legal survival may have helped thaw relations between them, leading to the merger talks.

“When you’re down in the trenches with someone for a long time, and it’s us versus them, relationships tend to happen that wouldn’t have otherwise,” Klein said. “In order to survive, they have to take a serious look at [a merger].”

Executives at both companies have previously acknowledged pressure from investors to merge.

Jason Robins, DraftKings’ chief executive, told Reuters last September that he would consider a merger if FanDuel was interested.

“In the case of a merger with FanDuel, even if we were really in favor of it, they’d need to want to do it too,” he said at the time.

But FanDuel chief executive Nigel Eccles, in interviews last year, said he wasn’t interested in a tie-up with DraftKings. He said his rival had cut bad deals, in particular, an arrangement with Twenty-First Century Fox Inc. that saw DraftKings commit to spending $250 million on Fox Sports Network ads in exchange for a $150 million investment.

“If we merge, we take on those deals that we turned down. That doesn’t improve our economics, it makes it worse,” Eccles told Bloomberg in November. “I can see why it would be attractive to them. I don’t know why they think it would be attractive to us.”

In February, a regulatory filing by Twenty-First Century Fox Inc. indicated that the Rupert Murdoch-owned media company had marked down the value of its overall $160 million investment in DraftKings Inc. by about 60 percent, or $95 million.

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Source: Boston Globe

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