Does bigger mean better in the mega-merger of Flutter and TSG?

The date 5 May 2020 is unlikely to be remembered for much other than Covid-19, but in the online gambling world, it saw the creation of a monster. The merger of Flutter and The Stars Group (TSG) to form the creatively named Flutter. It was as if the gambling gods gathered up most of the pieces of the UK online industry, smashed their hands together and created something fantastical in terms of its sprawling scale and reach. In terms of the wider leisure sector, or even the land-based gambling industry, the economics are not really that big and it’s telling that this entire new business is not even 50% larger than bet365. But be in no doubt, this is a level beyond anything we’ve seen before.

What it represents is some of the most important brands in the sector and with revenues at a scale genuinely unimaginable just a few years ago. Flutter’s 2019 online revenue came in at just shy of £4bn, ahead of bet365 on £3bn and GVC on just over £2bn, although GVC’s combined retail and online revenue was £3.7bn to Flutter/TSG’s £4.2bn. For a sense of the scale, you simply need to compare to the one-time darling of the online sector, William Hill, with online revenue of £738m and total group revenue of £1.6bn in the same period. Kindred on £900m also doesn’t come close and many of the businesses we consider power players on £300m-500m of annual revenue suddenly look decidedly underweight in this fight.

But you might ask, so what? Is bigger really better in a sector where agility and innovation are still key drivers of success? Did being sub-scale really prevent Sky Bet from gaining market share in the UK? It’s not particularly clear if GVC’s scale has been a major factor in it gaining market share in the UK or continuing to power on in Germany or other European markets. It’s arguable most of its success with brands it has acquired is more akin to reviving distressed assets. When it comes to Flutter, there are no underperforming brands in this merger of equals aside from possibly the Betfair Exchange and driving value will rely on more complex and less tangible changes.

Where’s the value?

The most obvious value addition is the purely economic benefit of synergies and centralised cost savings, but this is not as simple as it appears. Those scale benefits get diluted somewhat when applied across several brands on disparate platforms. PokerStars has historically been able to flex its marketing muscle effectively due to its single brand, single platform, single message ethos. The same can be said of bet365. Both firms can enter a market, often where it already has a sizeable player base, and throw money at marketing when the conditions are right. It’s not clear if that will be a luxury afforded to Flutter in many of the markets it enters.

The advantage differs in some of its key markets. There is no doubt this is the preeminent operator in the UK online market with around 30% market share of the sports betting sector and a near monopoly on the betting exchange sub-vertical. In Australia, it is also now by some distance the leading online sports betting operator, while in the US it has over 40% of the market through FanDuel alone, and one of the most interesting and challenging competitor brands in Fox Bet now brought into its stable. It’s also worth noting PokerStars is the leading Italian online operator despite very minimal sports betting revenue.

This consolidation of power didn’t trouble the competition authorities in any of these markets, but it is not one to overlook and Flutter will certainly aim to strategically consolidate its positions in these markets. The question is: what material advantage is gained from this scale that didn’t exist in the already supersized entities being smashed together into this Frankenstein’s monster of an egaming giant? Is it simply benefits of scale on the operational side or is it more than this? One of the key conceits could arguably be the removal of key competition with Paddy Power and Sky Bet butting heads in the UK, BetEasy and Sportsbet rivals in Australia (prior to the planned merger) and PokerStars an increasing threat to casino in any market Betfair would be looking to expand into.

A cooperative rather than combative approach is clearly going to be more of a benefit as they navigate the next level of gambling regulation, but again the evidence of the past isn’t incredibly encouraging in this respect in terms of brands being able to grow and scale concurrently. It’s likely we will see some brands being phased out in certain markets or de-prioritised in terms of spend, and if they are all eventually ending up on the same platform it could be a hard task persuading the consumer they need yet another Flutter sports betting site on their phone. And this will be a big consideration for management.

Proving the model

This new business contains a number of very strong and well-embedded brands: Paddy Power, Sky Bet, Betfair, PokerStars. How these overlap and interact is going to be a huge challenge and it’s notable not one that either Flutter or TSG has solved previously, with the underlying strategy seemingly being one brand per market in each vertical. Even that may be a little challenging going forward, not least in the US where there are two expensively constructed brands to contend with. It’s arguable Fox Bet and FanDuel hit different segments of the market, but that is also the argument around Betfair and Paddy Power and that’s not quite worked out how maybe they would have hoped so far.

The biggest challenge, however, will be on the integration side. This will be an enormous endeavour, not least on the technology side where there are two legacy platforms in Betfair and PokerStars, one legacy third-party platform in OpenBet and a bunch of other integrations and middle-ware platforms built around them to try and bring together. TSG is halfway through its big sportsbook rebuild and does that get integrated into Betfair or run on its own or something in between the two? Does PokerStars’ back-end dominate or does it integrate? And how does this work in the US market? These are all huge and hugely significant questions to answer that could all have big impacts on revenue and roadmaps for years, not months, to come.

And that’s not the only integration issue to contend with. These are three businesses built in different ways with very different cultures trying to work together where they used to compete. PokerStars’ corporate culture could not be more different to Sky Bet or Paddy Power, while there remains no shortage of blue water between the latter two and we’ve not even mentioned the Hammersmith crew. A lot of this will be driven by management who have been working closely to try to make sure this all goes as smoothly as possible but we all saw the disruption with PPB and this will be something no doubt they are keen to avoid.

Managing success

The management are at the core of this merger. True executive talent is incredibly important to online gambling and is at the heart of every success story we’ve seen to date. The strength of the combined management team is thought to be one of the driving motivators for the deal and the faith in the combination from investors. This group is thought to be able to lock what remains a lot of latent potential in the TSG business, the Betfair business and the international expansion of the Sky Bet model. There are some big incremental jumps that can be made here if they get the strategy right, if everyone can work together and there is nothing like the brain drain we saw in the PPB merger.

In a time of rising regulatory pressure, a pending global recession and the exhausting list of challenges it faces, this may be the biggest fight on Flutter’s hands in the year ahead. And there are plenty of those. But for now, the City seems convinced it has a persuasive story to tell and the prospect of an expanding US market where Flutter dominates is clearly an attractive proposition. It’s closer to home where some of the more interesting questions need to be asked, however. How does it grow in the UK? Where can it grow in Europe? How does it extend cross-sell in key markets? How do the brands work together? And how does the wider business cope with the shift to tighter regulation and lower-staking gambling ecosystem? These are huge questions it needs to answer and there won’t be simple answers for any of them.

What management will need to prove is it can grow internationally, consolidate in key markets and drive synergy benefits, improve the technology and platform piece and drive more efficient and effective marketing across its network of complimentary and competing brands. So not much then. Above all, it needs to show that this really is online gambling at the next level and not just everything turned up to 11. That this is not just online gambling ‘one louder’. Because that really would be an opportunity missed.