Failed Merger Deal Leads to DFS Giant Losing More

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New York- based Daily Fantasy Sports (DFS) operator, FanDuel Plc. seems to have been dealt with the larger brunt of the failed merger with their prime rival, Boston- based DraftKings Plc. The dissolution of the deal triggered a clause in their contract that gave their existing investors an equity boost. On top of that, two of the co- founders of the company, Lesley Eccles and Tom Griffith, who was also their Chief Product Officer, as well as three other board members have resigned from their posts in light of these changes.

Brief History of the Failed Merger Deal

Fantasy sports, which have been a popular recreational activity in the USA for many decades, gave birth to FanDuel Plc. and DraftKings Plc. in 2009 and 2012 respectively. The two companies quickly grew to acquire mainstream popularity and substantial investments. However in 2015, when a DraftKings employee used inside trade information to win USD $350,000 on a number of FanDuel contests, a series of investigations began on their operations. A long line of political battles followed with individual states declaring their services unlawful. This was countered by extensive and expensive lobbying efforts to re- establish and legalise the sport as a game of skill.

DraftKings and FanDuel announced around a year ago that they were close to finalising merger deal talks that had allegedly been going on since the January of 2016. Very few details about their plans were revealed even after they were announced. Right from the start, experts were aware that a single entity born out of the merger of these two brands would completely dominate the marketplace. Despite being rivals, the two companies had always posed a huge challenge for smaller operators, looking to break into the industry. A healthy dose of competition is always prescribed for the success of any industry. Not to mention that the Federal Trade Commission (FTC) is exists to ensure that is maintained whenever any kind of business proposition emerges.

The details of the consolidation deal between the DFS giants were finalised in November of 2016. Within a few months the FTC put a block on it. Both companies argued that the merger would bring “substantial benefits’ to the customers and that it was in their “best interest.”

They were left with the option to either abide by the decision or fight the FTC on it. Ultimately, the two decided to terminate agreement on the merger deal and also withdraw all litigation from the FTC. However, both companies maintained that the merger deal would have been beneficial for all parties involved.

Existing Investors Increase Their Control of the Company

According to a report published by The Herald Newspaper in Scotland, the dissolution of the deal between the two DFS companies triggered a merger- termination clause that was agreed upon at the start of this year. As a result, the co- founders of FanDuel Plc., including Nigel and Lesley Eccles, not only saw their shareholding in the business slashed but their rights as shareholders watered down too.

According to the paper, as an outcome of this clause, the Shamrock Capital Advisors would saw their number of shares grow by a third. It read, “Those who bought into the company in 2014 via a USD $70 million fundraising led by Los Angeles private equity house Shamrock Capital Advisors, an investment vehicle for the Disney family, have been awarded one new share for every two existing shares they held in the company.” Additionally, the shares held by the Kohlberg Kravis Roberts (KKR) will also increase by a mammoth 235 per cent.

The paper reported, “Investors who participated in a USD $275 million fundraising led by private equity giant Kohlberg Kravis Roberts (KKR) in 2015, meanwhile, have been awarded 2.35 new shares for every existing share.” Others who invested as part of the 2014 and 2015 fundraisings events will also received additional shares in line with those allocations. Early investors included the Scottish Investment Bank, Pentech Ventures and angel investor, Simon Murdoch.

The number of shares awarded as part of a management incentive scheme has increased dramatically. A total of 59 new shares are being issued for every one that is already held. However, the rights attached to them have significantly watered down. Half of those have become deferred shares. This means they would be the last to be repaid in the event the company’s assets ever have to be liquidated. Similarly, the rights attached to the shares held by the company’s seed investors, thought to include Mr. and Mrs. Eccles, and Scottish Enterprise, have halved in the same way.

Under FanDuel’s management incentive scheme, there has been a sixty fold increase in total shares and a corresponding dilution in the rights to them. This distribution increases investors’ ownership in the company from 54 to 71 percent. The proportion of FanDuel’s stock that is owned by Shamrock, KKR as well as a range of other investors such as NBC Sports Ventures, Google Capital, and Time Warner Investments, has increased. These figures have been determined using the most recent statement of capital from the company that was issued on the 8th of July 2017. The report clarified that a total of 4.4 million shares were in issue at the time.

The restructuring has also overridden any rights of FanDuel being able to buy back the shares that were issued as part of the 2014 and 2015 funding rounds. Before the merger- termination clause kicked in, the company had the right to buy back their shares for at least 150 per cent of the amount they received from those investors in the first place. They would have been able to buy out the 2014 investors at the end of June this year, and the 2015 investors a few months later in January 2018.

FanDuel Plc. Lost Five Board Members as Part of the Merger Termination Clause

In addition to the extra shares, key investors at FanDuel Plc. have also taken control of a larger portion of the company in the board room. According to a follow- up report also from The Herald Newspaper, FanDuel’s Board of Directors has reportedly been halved from 10 to five members. The founders of the company now hold just one of those seats. The two private equity houses, KKR and Shamrock Capital Advisors, have tightened their grip on the DFS business. The board has been cut with FanDuel having to hand over a larger chunk of equity to these backers.

Co- founders of the company, Lesley Eccles, and Tom Griffiths, who also served as their Chief Product Officer, have both resigned from their positions in the board. Representatives of investors, Pentech and NBC Sports Group, have also been reported to have stepped down from their positions as board members.

Alan Resnikoff from Shamrock Capital Advisors has resigned from his position on the board. However, his colleague, Michael LaSalle, will continue to remain in his seat on the board of the DFS operator. Ted Oberwager from KKR is another member who has decided to keep his seat on the board following these changes. The other two places have been retained by representatives of early investors, Piton Capital and Comcast Ventures. Piton Capital led a USD $4 million fundraising round in 2011; a couple of years after the company was founded. Comcast Ventures led an USD $11 million fundraising round for the company in 2013.

Last but not least, FanDuel Co-Founder and Chief Executive, Nigel Eccles, will also hold on to his seat on the board of members following the changes. The founding team will now controls just one of five seats compared to the three of ten that they had held previously.

After the dust has settled on the situation, FanDuel founders will account for only 20 per cent of the board. This is down from the earlier 30 per cent hold they had before the changes. Shamrock and KKR, on the other hand, will grow to control 40 per cent of the board between them, compared with 30 per cent that they had held previously.

In January of this year, the company passed a special resolution that said that if FanDuel’s merger with DraftKings did not go ahead as planned, the company’s early investors would see their positions in the company slashed in favour of those who invested in 2014 and 2015.

FanDuel was founded in Edinburgh, Scotland but now has revenues coming entirely from their US endeavours. More and more of their customers are playing games on their site that are based on the real- life performances of American football and baseball players.

Last year the Eccles, who founded the company, Griffiths, their Head of Design, Rob Jones, and Lead Engineer, Chris Stafford, moved permanently from Edinburgh to New York to be closer to FanDuel’s main offices and market. Also last year in September, Lesley Eccles, who was previously appointed as the Head of Marketing, stood down from the position and took a seat on the board as a Non-Executive Director.

Funding History of FanDuel Plc.

FanDuel Plc. has remained well funded throughout its course so far. It was the first DFS provider to break into the mainstream marketplace in full force. Since setting up shop in 2009, they have pushed through six publicly known funding rounds. The company has raised a total of more than USD $350 million since their inception.

The first of the fundraising events were held in July of 2009, which was mainly backed by the Scottish Investment Bank. They raised USD $1.2 million. The money was used to firmly establish the company’s position in the market. Piton Capital raised another USD $4 million for the company in September of 2011 followed by another round of fundraising in April of 2012, when they managed to gather another USD $1.3 million. Comcast Ventures raised a further USD $11 million in January of 2013 for the company. Another round of fundraising was held in September of 2014. The main backers for the even were Shamrock, KKR, and NBC Sports Ventures. They invested a total of USD $70 million for the company that time. The last major fundraiser for FanDuel was held in July of 2015, when KKR, Google Capital, Time Warner, NBC Sports Ventures, Comcast Ventures and Shamrock Capital raised USD $275 million in total.

New Direction for FanDuel

The redistribution of equity is the most recent development left in the wake of the abandoned merger. Both FanDuel and DraftKings have now been forced to seek out new plans for independent, long- term liquidity. At the end of July 2017, FanDuel announced that will be withdrawing from the UK marketplace. A few days later they also went on to reveal plans to restructure their capital table.

The company announced their exit from the European market both via their Twitter account and through direct emails to their users in the country. The news came less than a year after their high profile launch in the United Kingdom. The company added that the move came on the back of new plans to ramp up their products in the main US market.

The announcement to leave UK was short and sweet. They classified the departure from the market as a hiatus. The company also promised that all their users would be fully refunded for any remaining balance they had with the site. They also announced that their time in the UK remained rather successful; “almost GBP £1 million” was won by players in the country over the past year.

A company spokesperson said that that FanDuel will not be offering a soccer product for the upcoming English Premier League (EPL) season. With new plans to revitalise the US offerings, it is understandable that they will be focusing all their assets on to the 53 million strong market in the USA.

The spokesperson said, “We will not be operating our UK product this upcoming EPL season to focus on our product in the US. As we approach the NFL season, we are allocating all of our resources towards ramping up a US product that consumers love and building out complementary fantasy sports products. There are over 53 million people playing fantasy sports in the United States and we are investing all of our resources on that market.”

FanDuel’s 2015 funding round was both its largest and its most recent to date. DraftKings Plc. too raised around USD $300 million around the same time. Unfortunately, the ensuing advertising war between the two took a toll of their monitory reserves. According to a report from a month ago, investors from FanDuel had been getting ready for another round of fundraising around the time their merger plans were announced. In terms of FanDuel’s restructure plans, one of their spokeswomen merely cited that “we are restructuring our capital table” but declined to expand of that comment further.

Meanwhile, the CEO of DraftKings Plc. declared that they did not need to raise any funds at the moment. They clarified that the company would not need to raise any more money ahead of the upcoming National Football League (NFL) season. The company received USD $100 million in Series E1 round of funding earlier this year in March. Robins said, “We don’t need money now. We raised a bunch of money during the merger process.”

FanDuel Plc.

FanDuel Plc. is a leading daily fantasy sports provider that holds a unique focus on making sports more exciting for their fans. Founded in 2009, FanDuel has redefined fantasy sports. They offer a multitude of daily, weekly, and season- long gaming options for the major sporting organisation. This includes the National Football League (NFL), the National Basketball Association (NBA), the Major League Basketball (MLB), the National Hockey League (NHL) and the English Premier League (EPL). With new public and private leagues forming daily, the company hosts contests involving players that range in sizes from two to the thousands.

FanDuel is also the Official Partner of the NBA and has multiple other deals with NFL and NBA teams too. They are involved in driving fan engagement, hosting live events and even creating once in a lifetime experiences for sports fans throughout the spectrum. The company is headquartered in New York City, but own offices in Los Angeles, California, Orlando and Florida in the USA; as well as Edinburgh and Glasgow in UK. The company has proven popular with fans and investors alike. FanDuel has raised more than USD $363 million in funding from investors including KKR, Google Capital, Time Warner/ Turner Sports, Shamrock Capital, NBC Sports Ventures, Comcast Ventures, Pentech Ventures, Piton Capital and Bullpen Capital over the years.

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