The newly announced deal between Flutter Entertainment and Toronto-based The Stars Group (The Stars Group Stock Quote, Chart, News TSX:TSGI) should be a boon for shareholders of both companies, says Gianluca Tucci, analyst for Echelon Wealth Partners.
Shares of The Stars Group spiked yesterday as news broke of a friendly takeover by Dublin-based Flutter Entertainment, which owns Irish gambling business Paddy Power. The proposed all-stock transaction would see Stars shareholders receive 0.2253 new Flutter shares in exchange for each TSGI share. The combined entity would have Flutter shareholders owning 54.64 per cent of the company with 45.36 owned by TSGI shareholders. By 2018 financial results, the combined company would have had revenue of £3.8 billion (C$6.3 billion).
“This exciting combination will allow us to enhance and accelerate our existing strategy,” said Rafi Ashkenazi, CEO of The Stars Group, in a press release on Tuesday. “In recent years, we have transformed TSG from a single product operator in poker, to a diverse global leader with multiple product offerings across poker, gaming and sports betting. The combination with Flutter will further enhance our company’s core strengths, and position us strongly for the future in this rapidly evolving industry. I’m delighted to be joining the Board of the Combined Group and to serve as its COO.”
Tucci says the deal should deliver substantial value creation in pre-tax synergies along with cross-sell opportunities and lower finance costs and is expected to be at least 50 per cent accretive to Flutter’s EPS for the first full financial year following the closing of the deal.
Tucci estimates the deal values TSGI at approximately a 4.4x multiple of LTM EV/Revenue estimates and a 14.4x multiple of LTM EV/EBITDA estimates. For context, the analyst says that Flutter is currently trading at 2019 EV/Revenue and EV/EBITDA multiples of 3.6x and 19.9x, respectively.
“We note TSGI has not been valued at the multiple we believe it has deserved over the past few years and view this transaction as very prudent and opportunistic on the part of FLTR – we are looking forward to the torque and operational excellence of the combined entity and view the acquisition as positive for both entities’ shareholders,” writes Tucci in a note to clients on Wednesday.
“FLTR has traded at a premium valuation to all its digital competitors we believe mainly attributed to its FanDuel asset and growth profile. FLTR owns and operates powerful brands such as PaddyPower, betfair, and FanDuel, among others, of which TSGI’s investments, most notably Fox Bet, should be greatly leveraged along with its technical superiority, to exploit the relatively new business of Betting in America. Of note, Fox Sports will have the right to purchase an 18.5 per cent equity interest in FanDuel Group at its market value in 2021,” he writes.
“We view the probability of shareholder approval as likely and do not expect material anti-trust impediments,” Tucci says.
The analyst has changed his rating for TSGI from “Buy” with a price target of C$32.50 to “Tender”.