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Flutter to buy The Stars Group to create world's largest online betting operator

Ireland's Flutter Entertainment PLC, previously known as Paddy Power Betfair, agreed to acquire Canada's The Stars Group Inc. in an all-stock transaction that would create an 11.7 billion global leader in sports betting and gaming.

Under the deal, The Stars Group's shareholders will receive 0.2253 of a new Flutter share in exchange for each share of The Stars Group. Following the merger, Flutter shareholders will own about 54.64%, and the Toronto-based company's shareholders will own about 45.36% of the merged entity, according to a joint regulatory filing Oct. 2.

The combined company will be based in Dublin and listed on the London Stock Exchange, with a secondary listing on Euronext Dublin.

The combination is expected to be completed in the second or third quarter of 2020, subject to the approval of Flutter and The Stars Group's shareholders, and relevant merger control, foreign investment and gaming related approvals in the U.K., Ireland, Australia, the U.S. and Canada.

The Stars Group directors and private investors Caledonia (Private) Investments Pty. Ltd. and ValueAct Holdings LP have agreed to vote all their The Stars Group shares, which amounts to 23.79% of The Stars Group outstanding shares, to Flutter.

Upon completion, Flutter Chairman Gary McGann will become the chairman of the combined group, while The Stars Group Chairman Divyesh Gadhia will be the deputy chairman. Flutter CEO Peter Jackson will be the CEO, and The Stars Group CEO Rafi Ashkenazi will be COO. Flutter CFO Jonathan Hill will continue as CFO of the merged company.

In all, the merged entity will have a 14-person board consisting of nine nonexecutive directors: five nominated by Flutter, three nominated by The Stars Group and former Sky Betting and Gaming CEO Richard Flint.

In connection with the deal, Flutter has entered into deals with FOX Sports, which is The Stars Group's U.S. media partner for FOX Bet, and Fastball Holdings LLC and Boyd Interactive Gaming LLC, which are Flutter's co-shareholders in the FanDuel Group.

Under the FanDuel deal, Fox Sports will have the right to acquire an approximate 18.5% equity interest in FanDuel Group at its market value in 2021, which will be structured as a 10-year option from 2021, subject to a carrying value adjustment.

Fastball and Boyd will receive a total payment of 12.5% of the increase in FOX Bet's market value between completion of the Flutter-The Stars Group merger and the exercise of Flutter's option to acquire Fastball's remaining equity interest in FanDuel Group in July 2023.

In return, each of FOX Sports, Fastball and Boyd have waived the exclusivity provisions that form part of the existing contractual arrangements in relation to the relevant US subsidiaries of The Stars Group and Flutter.

"Our FOX Bet partnership is off to a great start, and teaming up with Flutter and FanDuel will allow us to build on that strength and jointly capture the significant market potential ahead of us. We're excited to be able to expand our partnership into FanDuel, which together with FOX Bet, will be a leader in sports wagering in the U.S.," Fox Corp. Executive Chairman and CEO Lachlan Murdoch said.

Flutter said the acquisition of TSG is expected to deliver pretax cost synergies of £140 million annually and potential revenue cross-sell in international markets and lower finance costs. The combined annual revenue in 2018 for the two companies was £3.8 billion, making it the largest online betting and gaming operator globally, the company said in a statement.

Flutter expects the acquisition to be at least 50% accretive to its underlying EPS in the first full financial year following completion and hopes to deliver a post-tax return on invested capital that exceeds Flutter's cost of capital by the end of the third full financial year from completion.

Flutter said strong free cash generated from the acquisition of The Stars Group is expected to result in rapid debt reduction, with Flutter's net debt to underlying EBITDA target of 1.0x to 2.0x being maintained in the medium term.

"The combination represents a great opportunity to deliver a step change in our presence in international markets and ensure we are ideally positioned to take advantage of the exciting opportunity in the US through a media relationship with FOX Sports as well as our development of US sports betting through Flutter's FanDuel and TSG's FOX Bet brands," Jackson said.

Shares of Flutter surged as much as 15.6% to €98.96 following the announcement.

Goldman Sachs International served as financial adviser and corporate broker for Flutter, PJT Partners served as its financial adviser, and Goodbody as its corporate broker. Barclays, Moelis & Co. LLC and BMO Capital acted as financial advisers for The Stars Group.