Why archrivals DraftKings, FanDuel want to merge

DraftKings and FanDuel have been ferocious rivals in the budding daily fantasy sports business. But that isn't stopping the nation's two dominant players in this niche from exploring a merger as regulators heighten their scrutiny and as new competitors arrive on the scene.

Talks between DraftKings and FanDuel are still in their early stages and could fall apart, a person close to the situation told CBS MoneyWatch. The companies have previously discussed a possible tie-up, with DraftKings CEO Jason Robins saying he was open to the idea. The deal currently under negotiation would be structured as a merger of equals, said the source, who declined to be identified since the discussions are private.

Legal Sports Report, a website that closely tracks the daily fantasy sports industry, said that DraftKings may be under financial pressure after failing recently to raise additional funding, forcing it to consider a merger.

"They are in a little bit of trouble right now," said Father Richard McGowen, a Catholic priest and a professor at Boston College who follows the gaming industry, in an interview. "There is no doubt about it."

A merger, even if it comes to fruition, may not address the companies' problems. Antitrust experts question whether a DraftKings-FanDuel merger would survive antitrust scrutiny. Regulators have tended to reject the argument that financial distress is sufficient rationale for consolidation.

That logic failed to sway the Federal Trade Commission when it moved in 2015 to block a proposed $6.3 billion deal between Staples (SPLS) and Office Depot (ODP), noted Brooklyn Law School professor Jodi Balsam. "That's a very common argument that companies make," she said in an interview.

Sports economist Victor Matheson of the College of the Holy Cross also expresses skepticism that a merger of DraftKings and FanDuel would benefit consumers.

"Overall, is the world better off with just one casino or is it a better world when consumers can choose from multiple ones?" he asked. "Most people would say that the existence of multiple casinos makes it a much better deal for gamblers."

DraftKings and FanDuel face significant legal and operational challenges in states around the country. In some state capitols, they are fighting efforts to categorize daily fantasy sports as gambling. And in parts of the country where daily fantasy sports have been legalized, such as Indiana, Tennessee and Virginia, the companies must contend with higher fees and taxes. They will also have to be more transparent in how they operate given the questions that have been raised about their business practices.

"They have maintained that they can't survive at a rate that a casino gets taxed," McGowen said. "I have a feeling that the states are going to say, "Maybe you shouldn't survive'."

There are more than 57 million fantasy players in North America, according to the Fantasy Sports Trade Association. The numbers of daily fantasy players increased from 31 percent to 2012 to 64 percent in 2015.

Note: CBS News parent CBS Inc. has an ownership stake of less than 1% in FanDuel.

  • Jonathan Berr On Twitter»

    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.