DraftKings, FanDuel to merge after costly marketing battle; profits remain elusive

By Alexandra Berzon

Daily fantasy sports sites DraftKings Inc. and FanDuel Inc. 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 chief Nigel Eccles will be chairman. The new board will 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 privately held companies, which run the two largest daily fantasy sports sites, said they haven't yet decided whether they will maintain both brands when the deal closes, most likely in the second half of 2017.

In a joint phone interview Friday, Mr. Robins and Mr. Eccles said combining the companies will allow them to innovate more by freeing up money. That will further efforts 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 visionand really do have a boatload of ideas."

Daily fantasy-sports sites in general allow users to create virtual sports teams using real athletes from a given league. The make-believe team's standing rises and falls based on the real-life performance of its individual members. The site operator makes money from entry fees, often amounting to about 10%, and doles out cash to users whose teams do well.

DraftKings and FanDuel aren't disclosing their valuation, which likely 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 when they helped prompt 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 won a victory in the summer when New York's legislature allowed them to resume operating there, having been 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 -- a result achieved in 10 states, mostly in the past year. Messrs. Eccles and Robins said they hope the legislative victories will continue next year.

Neither company has figured out a route to profitability. 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 the companies wouldn't 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 had ripple effects across the sports media industry. Executives at Walt Disney Co. recently 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.

DraftKings and FanDuel account for the vast majority of daily fantasy sports players, which they estimate to number around five million. An attorney for FanDuel said he expects the deal to undergo an antitrust review by the Federal Trade Commission but doesn't believe that will pose a problem. Daily sites, which allow players to assemble virtual teams and get results at a fast clip, are part of a broader fantasy sports universe, the attorney said.

Websites like 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, he 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.

Corrections & Amplifications: Yahoo offers daily fantasy sports. An earlier version of this story incorrectly stated that Yahoo could enter that market at a later date. Also, fantasy sports sites do operate in Illinois despite legal challenges there. An earlier version of this story incorrectly stated that they did not operate in Illinois. And the name of an attorney for FanDuel Inc. has been removed from this article because of the terms of the interview requested by FanDuel.

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

(END) Dow Jones Newswires

November 19, 2016 02:47 ET (07:47 GMT)

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