At lunchtime on Friday, a story on Bloomberg caused Flutter’s share price to pop by eight per cent. 

It was reported the casino group Caesars Entertainment and the giant private equity firm Apollo Global Management were vying to buy William Hill, the UK bookmaker.

This morning, Caesars Entertainment agreed a $3.7 billion bid for William Hill. Caesars is already in a joint venture with the company. 

Among the UK bookies, William Hill wouldn’t be considered the pick of the litter. Its share price has lagged behind that of competitors like Flutter and GVC. And this year it’s had to close more than 800 of its 2,300 betting shops.

Why is Caesars entertainment throwing $3.7 billion at an ailing UK bookmaker? And why did news of the deal add €1.5 billion to Flutter’s market cap?

The interior of the Caesar’s Palace casino in Las Vegas.

Racing to catch up

Caesars wants William Hill for its technology. Caesars is a big name in US gambling. It has locations all over the country and all the relevant licences. 

Caesars problem is that it doesn’t know how to do online and sports betting. In the United States, sports betting was illegal outside Nevada until a 2018 Supreme Court ruling. 

Caesars palace is an old-fashioned casino, focused on gaming at physical locations. After the 2018 ruling, the floodgates opened to new types of betting in new locations. Caesars and the other casino groups weren’t well set up to capitalise. 

In the UK and Ireland, on the other hand, sports betting is a fact of life. William Hill is an 84-year-old company. And the bookies have been perfecting their online and mobile offerings for the best part of a decade.

America’s gaming companies just aren’t as sophisticated as British and Irish ones when it comes to online gaming. That’s why Caesars wants to partner up with William Hill.

Caesars is already in a joint venture with William Hill, giving it access to William Hill’s technology. So why is it trying to buy the company outright?

Market mania

Draft Kings is one of the two biggest fantasy sports betting games in the US. The other big one is FanDuel, which was acquired in 2018 by Flutter.

Fantasy sports games are a significant part of this story because they’re being used as a backdoor into sports fans’ smartphones, which is where the money will be made from online betting. 

DraftKings and FanDuel have up to now offered innocent play-along games for sports nuts. But as online gambling gets legalised, they’re being turned into fully-functional British-style sports betting apps. 

Flutter’s competitors either don’t have experience in gambling (DraftKings), or a way to access US punters (GVC), or the right technology (Caesars and the casino groups). 

In the states where this strategy has been tried out, it’s been highly effective. Fantasy sports players turn out to be excellent customers for betting apps. 

The significance of DraftKings is that at the beginning of this year, it floated on the stock market. It’s the only stock which is solely focused on the US online sports betting market. The DraftKings flotation grabbed everyone’s attention because it trades at such a giant valuation – 5.5 times revenues. By comparison, casino operators like MGM Resorts trade at 0.9 times revenue, Penn National Gaming at 1.6 times, Wynn Resorts at 1.2 times, Boyd at 1.1 times revenues, and Las Vegas Sands at 2.7 times. 

The DraftKings flotation showed the gaming industry that a great way to boost your stock price is to get into online sports betting. For Caesars, acquiring William Hill is a step towards getting valued at a DraftKings-like multiple. Indeed, Caesars has already said that it intends to sell off William Hill’s UK business, once it has taken what it needs for its online business in the US. 

Deals to be done

Why did Flutter and the other UK bookies’ share price spike by 8 per cent? “The fact Apollo was at the table shows private equity interest in the sector,” says Paul Ruddy, equity analyst at Goodbody. “It highlights the value of US assets.” Big-money private equity firms sniffing around the industry can only be good news for the established players.

Caesars Entertainment is one of the biggest names in gambling, with revenues more than three times the size of Flutter’s. But in the US online sports betting market, it’s playing catch up to Flutter. Flutter’s acquisition of FanDuel shortly after the 2018 Supreme Court decision set it up in commanding position in the US market. 

Thanks to FanDuel, Flutter has 44 per cent of the online sports book market in states where it’s legal: New Jersey, Pennsylvania, Indiana, West Virginia and Colorado. 

Flutter’s competitors either don’t have experience in gambling (DraftKings), or a way to access US punters (GVC), or the right technology (Caesars and the casino groups). 

Over time you’d expect those companies to close the gap somewhat. Jack O’Halloran at Davy is forecasting 25 per cent market share in the medium term, and Paul Ruddy at Goodbody is forecasting 30 per cent online market share. Macquarie is forecasting 28 per cent market share for Flutter and 10 per cent for the new Caesars-William Hill combo.

Every point of market share counts because, in the next ten years, the market is forecast to be huge. Goodbody is forecasting 2028 US gross gaming revenue (the gaming industry’s version of revenue) to be $20 billion. By comparison, Flutter made €2.2 billion in revenue last year (when US revenues were still tiny). That’s $2.7 billion in dollar terms. 30% market share in the US would give it an extra $6 billion revenue per year. And Flutter has announced that in the early-to-legalise states, the economics are promising. On Flutter’s most recent earnings call, CEO Peter Jackson said US sports betting customers are spending more than Flutter expected they would. 

A big call

If investors continue to rate online sports betting companies this highly, Flutter might even decide to spin out its prized US business.

DraftKings has set the benchmark for how standalone US online sports betting companies should be valued. Unless Flutter’s share price hits that mark, from a shareholder value perspective, it might be argued that FanDuel would be worth more as a separate company.

It wouldn’t be an easy decision for Jackson. No doubt it’s more fun to run a fast-growing Ameican empire than to hand over a load of cash to shareholders. But given what investors are willing to pay for US sports betting companies, it might have no choice. A good problem to have.