Business & Tech

DraftKings’ merger with FanDuel challenged by FTC

Boston--07/24/15 Draft Kings behind the scenes in the office. Globe staff photo by John Tlumacki(business)

John Tlumacki/Globe Staff/file

Federal regulators will attempt to block the merger of Boston-based DraftKings Inc. and rival FanDuel Inc., they said Monday, jeopardizing a deal the two giants of the emerging daily fantasy sports industry have said is critical to their future.

The Federal Trade Commission said it would sue to stop the merger, arguing that the resulting company would control more than 90 percent of the multibillion-dollar US market for paid daily fantasy contests, a violation of antitrust laws.

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The companies have said they compete more broadly, facing off with providers of traditional season-long fantasy games, such as those offered by ESPN and Yahoo. But the FTC disagreed, declaring that DraftKings and FanDuel “are each other’s most significant competitor.”

DraftKings, one of the region’s best-known startups, and New York-based FanDuel said in a joint statement that they “continue to believe that a merger is in the best interests of our players, our companies, our employees and the fantasy sports industry.”

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The companies added that they were still weighing how to respond legally. But in an internal memo obtained by the Globe, a DraftKings executive said the company will ask a federal court to issue an injunction against the FTC’s action.

“Please don’t let this regulatory setback distract you,” cofounder and chief operating officer Paul Liberman told employees in the memo. “DraftKings is poised for growth, whether or not we merge with FanDuel.”

Industry observers said the threat of a federal lawsuit raises the prospect the companies will have to repeat the costly marketing battle that accompanied the industry’s rise to prominence two years ago. In the fall of 2015, it seemed as though DraftKings and FanDuel ads appeared during nearly every professional sports broadcast.

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Some analysts question whether there is room in the market for both outfits, which offer contests that allow players to select teams of real-life players, monitor their performances, and collect cash prizes for assembling top squads.

The companies — with about 5.5 million active users combined — take a slice of the entry fees, typically about 10 percent.

Eilers & Krejcik Gaming, a research firm, estimates that players spent $3.26 billion on daily fantasy contests in 2016, up about 4 percent from 2015.

It was also the first year in which net revenue at the faster-growing DraftKings surpassed that of FanDuel. The report said that after paying prize money, DraftKings’ revenue last year was $169 million, and FanDuel brought in $166 million. DraftKings was founded in 2012, while FanDuel dates to 2009.

The industry’s overall growth rate slowed last year, in part because of regulatory uncertainties.

Jeff Ifrah, a gambling lawyer who represents several smaller fantasy sports companies, said the companies are facing their own play clock, as the September start of the National Football League season approaches. NFL fantasy games are the most lucrative for DraftKings and FanDuel.

The FTC said an administrative trial in the antitrust case is scheduled for Nov. 21

“They need to find a solution before the NFL starts again,” Ifrah said. “They just don’t have the money to go into the season as separate companies while maintaining the same type of advertising and customer acquisition costs, but they also can’t unilaterally reduce the level of spend on ads.”

“The assumption is that they wanted this merger because their lives depended on it,” he added. Both companies are believed to be short on cash, Ifrah said.

The merger was intended to share marketing, legal, and other costs in an industry facing heightened regulation and tax demands. Earlier this year, DraftKings raised more than $100 million to shore up its finances, pending the merger.

“They do have some big decisions to make with relatively little time to make them,” said Chris Grove, an analyst who follows the business. “That’s especially true if you believe, as some people do, that this will be a one-winner market.”

The FTC said Monday that it’s seeking a federal injunction to prevent the companies from combining pending the administrative trial in November. The attorneys general of California and Washington, D.C., joined in opposition to the deal.

Industry observers said the companies could potentially offer the FTC a compromise in which the merged firm would withdraw from certain states or stop offering contests based on particular sports, letting smaller competitors take over those areas. Analysts, however, said both types of concessions would be painful. Also, there is no indication that the FTC would be open to such overtures.

David Klein, an attorney who specializes in gaming and fantasy sports and a managing partner at Klein Moynihan Turco LLP in New York, called the government’s case “easy,” saying the combined companies’ projected market share is just too large to explain away.

“If the FTC sticks to its guns, I think the government wins here,” he said.

Grove, the analyst, said DraftKings and FanDuel may offer clues soon as to how they plan to approach the case — or whether they might be willing to walk away, take their chances, and resume their rivalry.

“It may end up that this winds up being a way out for one or both of the companies if they decided along the way that they weren’t actually interested in merging,” he said.

The DraftKings-FanDuel deal is the second proposed merger involving a Massachusetts company to be challenged recently. In 2015, the FTC moved to block Framingham-based Staples Inc. from buying Office Depot Inc. The office-supply rivals called off the deal in 2016 after a judge ruled for the FTC.

Curt Woodward of the Globe staff contributed to this report. Andy Rosen can be reached at andrew.rosen@globe.com. Follow him on Twitter @andyrosen. Dan Adams can be reached at daniel.adams@globe.com. Follow him on Twitter @Dan_Adams86.
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