By Alexandra Berzon

Two major daily fantasy sports sites, DraftKings Inc. and FanDuel Inc., said they have agreed to set aside their bitter rivalry and become one as they face down regulatory and legal challenges to their business.

The two companies, which together spent upward of $500 million on advertising last year to try to build unique brands, had been talking about merging for months, with those talks accelerating in the past few weeks.

As expected, DraftKings Chief Executive Jason Robins will serve as CEO of the new company, while FanDuel CEO Nigel Eccles will be chairman. The new board will also comprise three directors from FanDuel, three from DraftKings and an independent director, with the company's headquarters divided between New York and Boston offices. The deal is expected to close in the second half of 2017.

In a joint phone interview Friday, Mr. Robins and Mr. Eccles combining the companies will allow them to innovate more by freeing up money. That will be part of an effort to entice more of the people who play casual season-long fantasy sports and other sports fans to play on their sites, they said.

"Neither company has been able to invest as much as we want to in a vast array of innovative ideas," Mr. Robins said. "We really do share a common vision and really do have a boatload of ideas."

The privately held companies haven't yet decided what brand they will operate under, or if they will maintain both brands. They are not disclosing their valuation, which is expected to have dropped precipitously in the past year in the wake of regulatory and legal challenges.

Even combined, the companies are relatively small, with FanDuel taking in around $100 million in revenue last year.

They have had an outsize profile due to heavy advertising and financial backing from major media and sports companies. FanDuel is backed by Comcast Corp., while DraftKings has investments from 21st Century Fox Inc. (21st Century Fox and News Corp, parent company of The Wall Street Journal, share common ownership.)

The sports sites' massive advertising outlays last year backfired somewhat when they helped to lead to regulatory and legal probes by several state attorneys general who said the sites violated state gambling laws. The companies, which deny any wrongdoing, have also faced civil lawsuits from consumers, as well as investigations by the Justice Department.

The challenges caused them to pull out of several key states.

The companies over the summer won a victory in New York's legislature that allows them to resume operating there, after having shut down in March when sued by the state's attorney general. They have lobbied heavily to try to convince state legislatures to explicitly legalize the activity. Ten states, mostly in the past year, have explicit laws recognizing the legality of fantasy sports. The companies are hoping that the wave of legislative victories will continue next year, Mr. Eccles and Mr. Robins said.

Neither company has figured out a business plan to become profitable. They both cut back significantly on advertising during the current football season as legal and lobbying bills have stacked up, painting a bleak financial picture, according to insiders and analysts.

Mr. Eccles said the business "is in pretty good shape" after "readjusting the business significantly" in the past year.

Mr. Robins said thecompanies would not discuss a plan to become profitable until meeting as a joint board after the merger. They likely will seek to raise more cash before completing the merger, he said.

Their advertising cuts have even had ripple effects across the sports media industry. Last week, executives at Walt Disney Co. told investors that a "significant" decrease in advertising from fantasy firms during the quarter ended Oct. 1 contributed to a 13% decline in ESPN ad revenue.

As for the decision to merge, the sites decided that the solution was to merge to save costs and get on the same page with their strategy going forward, according to an attorney for FanDuel.

The attorney said he expects the deal to undergo an antitrust review by the Federal Trade Commission but doesn't believe that will pose a problem. The companies account for the vast majority of daily fantasy sports players, which they estimate to number around 5 million.Still, they don't think they will have any issues because daily fantasy sports -- which allows players to assemble virtual teams and get results at a fast clip -- is part of a broader fantasy sports universe, the attorney said. Websites like Yahoo, ESPN and NFL.com operate season-long fantasy sports leagues and could enter the daily fantasy sports space once regulatory and legal issues are resolved, the attorney said. The sites will also be competing against the season-long fantasy sports sites to acquire new users, the attorney said, which will keep them competitive in both pricing and innovation.

"It only is successful if they can grow and capture users" from people playing other sites, the attorney said.

Erich Schwartzel contributed to this article.

Write to Alexandra Berzon at alexandra.berzon@wsj.com

(END) Dow Jones Newswires

November 18, 2016 13:35 ET (18:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.