THE FOUNDERS of daily fantasy sports business FanDuel will use the cash windfall they will receive if the sale of the business to Paddy Power Betfair goes through to help bolster Scotland’s burgeoning technology sector.
In an announcement to the London Stock Exchange Paddy Power Betfair yesterday confirmed that it is in discussions regarding “a potential combination” of its US business Draft with FanDuel “to create a combined business to target the prospective US sports betting market”.
FanDuel’s five founders, who have all left the business in the past two years, stand to make significant amounts of money from the sale as they all retain sizeable shareholdings in the firm.
Read more: Final FanDuel cofounder reveals next move with US launch Hone
Nigel Eccles, who served as FanDuel’s chief executive until he left to launch Edinburgh-based eSports business Flick at the end of last year, said he and his former colleagues would look to use the funds to help support other Scottish tech start-ups.
“The co-founders have already been investing their time and money in other companies,” he said.
“There are some great start-ups coming through Edinburgh right now and I’d love to be an angel investor in them.
“The other founders feel similarly that they would like to invest in some of those.
“I’m super excited about Edinburgh – it’s transformed in the last eight years.”
While the terms of Paddy Power Betfair’s approach have not been disclosed it is likely that the sale will be for a sum of at least several hundred million dollars.
Read more: FanDuel founder to tap into Scottish talent for eSports launch
The bulk of that will go to the company’s private equity owners, of whom Kohlberg Kravis Roberts (KKR) has the largest shareholding, with around a quarter of the firm now owned by a group of early investors.
That group includes the firm’s founders – Mr Eccles, Lesley Eccles, Tom Griffiths, Rob Jones and Chris Stafford – as well as the Scottish Investment Bank, Pentech Ventures and angel investor Simon Murdoch.
While FanDuel was valued at $1 billion as part of a $275 million KKR-led fundraising round in 2015, that figure was thought to have slipped due to regulatory issues in the US hampering the company’s growth.
In particular, a ban on sports betting in most states has caused the firm problems, despite daily fantasy sports being marketed as games of skill and not, as is the case with gambling, as games of chance.
Read more: FanDuel cofounder Lesley Eccles gears up for new tech launch
However, a much-anticipated judgment handed down this week in the US Supreme Court, which found that a ban on sports betting in the state of New Jersey is unconstitutional, has not only removed the regulatory obstacle for FanDuel but has opened up the market to betting businesses like Paddy Power Betfair too.
This is likely to bolster the valuation of FanDuel, which despite being founded in Edinburgh generates all its revenues in the US.
Analyst Neil Wilson of Markets.com said the ruling “paves the way for bookmakers to roll out operations across the country”.
“Something like 20 US states are either ready or have legislation in the pipeline to legalise the industry,” he said.
“This constitutes a significant chance to grab market share for all the major UK sports bookmakers and it’s no surprise that we are seeing this kind of move.”
Read more: FanDuel hands more equity to backers in merger-termination deal
Mr Wilson added that as a tie-up with FanDuel would allow Paddy Power Betfair to quickly roll out and scale up its US operations, it may be prepared to “pay big” for the business.
A deal would mark a turnaround in fortunes for FanDuel’s five founders who were forced to hand control of the business to KKR when a planned merger with rival DraftKings fell apart last year.
While FanDuel’s private equity backers had initially owned just over half of the firm’s equity, a merger-termination clause increased their shareholding and also watered down the rights attached to the founders’ shares.
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