Just days before releasing Q1 results, The Stars Group (TSG) announced a ground-breaking deal with FOX Sports. More than just another partnership, the deal lays bare TSG’s US strategy for taking a major share of the new legal sports betting market.
Key deal elements are:
- FOX will buy 4.99 percent of TSG for $236 million
- TSG is granting FOX a 10-year option to buy a 50 percent stake in its US business
- FOX Sports will provide The Stars Group with an exclusive license to use certain FOX Sports trademarks
- In states with legal sports betting, the partnership will launch FOX Bet, a new product allowing customers to place real money sports betting wagers
- The partnership will launch a second nationwide product—a free-to-play game awarding cash prizes to players that correctly predict the outcome of sports games
- TSG will pay “a variety of affiliate and licensing fees to Fox,” but there will be no revenue share. This means FOX won’t need to apply for affiliate licenses.
- TSG will spend at least an agreed minimum on marketing during the deal
TSG CEO Rafi Ashkenazi explained:
“We believe this strategic partnership uniquely positions us to build a leading betting business in the U.S., which represents one of the most exciting long-term growth opportunities for our company. Leveraging our proven media partnership strategy with Sky Sports in the UK, we are excited to partner with FOX Sports to integrate wagering into sports media and drive customer acquisition and retention in the U.S.”
Broadcast media strategy emerges across the industry
TSG shares rose 20 percent on news of the deal. Considering that the company derives only a tiny portion of its current revenue from US operations, this was a significant move. But, as Ashkenazi says, this is a long-term growth opportunity.
He had already signaled the possibility of doing a deal with a US broadcaster during the Q2 results call in 2018.
TSG completed the purchase of Sky Betting and Gaming (SBG) for $4.7 billion in July 2018. The deal rationale highlighted the importance of using broadcast media to recruit and retain customers.
At the time the deal was announced in April, the smart money was already preparing for legal US sports betting. Ashkenazi’s broadcast strategy for the US was at least partly in mind during the acquisition.
Between June 2018 and now, the company’s share price dropped by 45 percent. That’s the sort of move that CEO’s don’t often survive. TSG urgently needs a growth strategy that the market can support.
There’s another big gaming company in desperate need of a growth strategy, and curiously it too has struck a deal with a broadcaster.
Caesars Entertainment is replacing its CEO, and floundering to the point where legendary corporate raider Carl Icahn has put three of his own people on the board.
Caesars’ strategy involves a deal with major broadcaster Turner Sports. Work has begun on the construction of a Bleacher Report-branded TV studio in Caesars Palace Las Vegas.
FanDuel and DraftKings have shown the power of brands
The runaway winners in the New Jersey sports betting market are DFS brands DraftKings and FanDuel. DraftKings was the first in the state to launch a mobile app, critical as around 80 percent of sports betting is conducted online.
New Jersey is not representative of the US as a whole, or even of states with legal sports betting. On the other hand, after more than seven months of legal sports betting, the other brands in the market have not been able to catch up with the two DFS brands.
FanDuel and DraftKings are now well known right across the US. In partnering with FOX, TSG is joining with an even bigger brand.
The company held an investors presentation about the deal and used this slide to point out the brand issue:
No punches pulled. The graph columns may be anonymized, but in a two-player DFS market, Fantasy Sports 1 and Fantasy Sports 2 are unmistakably DraftKings and FanDuel.
Ashkenazi was undoubtedly telling investors that they shouldn’t worry about brand competition after this deal.
Is The Stars Group investing in old technology?
Fox brands were in the business headlines only last week, but for a different reason. After buying much of Rupert Murdoch’s media empire for over $70 billion, Disney sold 21 FOX regional sports networks to Sinclair Broadcasting.
The DOJ insisted on the disposal within 90 days to avoid Disney having too much control over US sports.
The auction was interesting for two main reasons. First, Sinclair only paid $9.6 billion, roughly half of what Disney hoped for.
This loss of value is because cable TV customers are leaving in droves. Even if they stay they are cutting their subscription packages to the minimum. Regional sports packages are often the first services to go.
Secondly, Facebook and YouTube didn’t bid. Amazon made a half-hearted attempt but dropped out early.
Sports viewers are turning more and more to online streaming services in preference to the old TV networks. Amazon would benefit from the FOX sports channels, but not at the price Sinclair was prepared to pay. It may have decided that it will simply be cheaper to do sports broadcasting in-house.
Who would argue that the future is more likely to see online sports streaming through a subscription service than through old-fashioned cable TV?
TSG’s deal with FOX is for up to 25 years. That’s ambitious. Many would not bet that cable TV will still be around in 25 years—remember fax machines?
Will TSG still look for more US corporate action?
During the investor call for the FOX deal, Ashkenazi told investors that he thought that doing a deal with a broadcaster was better than doing one with another large casino group or DFS operator.
Investors would be wrong to rule out Stars doing just such a deal.
DraftKings is still a potential takeover target. It is probably too small to stand alone in the US sports betting market and has brand value that will appeal to a lot of suitors.
Carl Icahn’s strategy for Caesars is a sale or merger:
“I believe the best path forward for Caesars requires a thorough strategic process to sell or merge the company to further develop its already strong regional presence….”
And DraftKings and Caesars have a sports betting partnership in place…
TSG has given no indications of interest in either group, but a move towards such a deal would have commercial logic. In the meanwhile, the deal with FOX is a big plus for Stars and will help propel them to a powerful position in the market.