FanDuel’s founder sues company for USD 120 M

FanDuel was valued at $465 million when it was acquired by European gambling company Paddy Power Betfair earlier this year, Recode reports.

However, Nigel Eccles, who founded the fantasy sports site back in 2009, states he didn't receive a dime in such transaction, thanks to a “waterfall” financial arrangement in which some of the company’s early investors were paid out first. FanDuel’s $465 million valuation wasn’t large enough that people who owned non-preferred shares — mostly regular employees, including founders — actually made any money.

Eccles thinks that’s unfair and that FanDuel was purposefully undervalued in the deal — an extraordinary claim — essentially cutting him and the company’s other employees out of the money. So Eccles filed a petition in Scottish civil court last month with FanDuel’s other three co-founders, including his wife Lesley, demanding that the company be revalued. Eccles thinks the founding team’s cumulative shares are worth more than $120 million.

Current FanDuel executives — including Eccles’s replacement as CEO, Matt King — are set to make millions on the merger.

Eccles has an interesting argument. Shortly after Paddy Power and FanDuel started discussing a deal, the United States Supreme Court ruled that the federal law prohibiting sports gambling, the Professional and Amateur Sports Protection Act, was unconstitutional. That meant that all U.S. states were suddenly free to make their own laws governing sports gambling.

On paper, that was great news for FanDuel, which operates fantasy sports contests where winners get cash prizes. It’s a business that many already considered to be a form of sports gambling, even though FanDuel fought that label for years. Now that states were free to legalize sports gambling, a market estimated at hundreds of billions of dollars, FanDuel stood to benefit.

But even though Paddy Power’s stock jumped 28 percent in the two weeks following the PAPSA decision, FanDuel’s valuation was not recalculated before the deal closed.

“The decision of the board (whose interests are aligned with preference shareholders), not to seek and act upon a new market valuation in the face of a material event, which is likely to have significantly increased the market valuation of FanDuel, is a breach of its fiduciary duties,” the petition reads.

Now Eccles wants the Scottish courts to force FanDuel’s preferred shareholders — investment firms KKR and Shamrock Capital, among others — to “purchase the Petitioners’ ordinary shares at market value.”

“The petition is simply not rooted in facts or reality,” a FanDuel spokesperson told Recode via email. “In preparation for this deal, an exhaustive process was undertaken with the anticipation of PASPA’s likely repeal. The deal was consummated consistent with the corporate governance rules and cap table established under the former founders’ leadership. The facts are that this was a sound business transaction that achieved the highest valuation possible for shareholders and was the right strategic move for the company’s future.”

Of course, there is a good counterargument here. It’s possible — perhaps likely — that FanDuel’s $465 million valuation was the best the company was ever going to get, even with the PAPSA repeal. FanDuel bankers shopped the company around to more than 100 different potential buyers, according to two sources familiar with the process. Paddy Power was the best option.

FanDuel’s business was also on the decline. Once valued at almost three times the merger price, FanDuel lost a lot of momentum thanks to a separate failed merger with DraftKings and numerous legal battles over whether or not the company violated federal sports gambling laws. It’s also unclear exactly how much impact legalized sports gambling would have on FanDuel’s business — it’s impossible to know how quickly states will adopt sports gambling laws, or how much it will cost FanDuel to operate in those states once laws are in place.

Eccles’s petition is the latest saga in what has been years of drama for FanDuel. First the company spent massive amounts of money on advertising while competing with rival DraftKings in the U.S. That advertising ultimately caught the attention of U.S. regulators, some of which thought FanDuel should be considered sports gambling, which was illegal. That led the company to spend massive amounts of money fighting legal battles.

Then FanDuel and DraftKings finally decided to merge in late 2016, a decision that many on both sides believed should have happened years earlier. That deal was essentially blocked by the Federal Trade Commission, so the companies dropped the merger.

Now, after years of arguing that daily fantasy sports should not be considered sports gambling, Eccles is hoping that new laws paving the way for sports gambling may finally bring him his payday.