City analysts view IG Group’s acquisition of Underdog as transformative for the LSE-listed trading and spread betting business, but also as one which holds many material risks exposing the valuation of the deal.
Speaking to SBC News, Bank of America (BofA) and Deutsche Bank’s Numis stockbroker subsidiary underscored this viewpoint when reacting to IG Group’s $1.1bn (£810m) takeover of Underdog, a US daily fantasy sports (DFS) and prediction markets firm.
The basis of the deal is a $380m cash reward, combined with 24 million new shares in an enlarged IG Group, valuing Underdog at $1.1bn.
Underdog is further incentivised by a $200m earnout dependent on the firm’s achievements in the burgeoning PM market, which could bring the valuation up to $1.3bn.
Both banks rated IG Group as a ‘buy’. BofA underscored the consensus that the transaction “carries strategic rationale”, to “diversify IG Group’s geographic and revenue mix, enable cross-selling across products… and to use IG’s expertise in financial markets to enable a potential product expansion for Underdog in prediction markets”.
Markets turn on IG Group
However, irrespective of its logic and rationale, by Friday, the market rejected IG Group’s deal.
Deutsche’s Numis analysts summarised this scenario: “Given the market’s initial reaction to the Underdog deal, with the shares -11% (vs. FTSE Allshare 0%) or -£0.7bn in market cap (notably comparing to the deal value c.£1bn), it is evident that the market does not share our initial positive view.”
For Numis, the market’s reaction is understandable and underpinned by the principal concern of regulatory exposures of prediction markets in the US.
The valuation of Underdog is materially impacted by pending US regulatory judgements. Should restrictions be applied the thesis of Underdog’s value will be considerably weakened.
Case in point, the deal announcement coincided with New York Attorney General Letitia James initiating a $35bn lawsuit against prediction markets powerhouse Kalshi for providing ‘unlicensed betting markets’ to NY audiences – a scenario underscoring the regulatory risks faced by PM operators in an unsettled US market.
Beyond regulatory risks, the economic ambitions of the deal come under the spotlight as analysts probe issues around Underdog’s strategic value beyond the US.
Its ability to enhance IG Group’s wider business has also been assessed, as are Underdog’s prospects to scale a prediction market offering in IG Group’s home market of the UK.
Issues are bound to crop up in spite of the duo’s optimism to bring predictions markets outside of US shores.
“Evidently this deal is bold, and to be clear, we do see it as high risk / high potential reward. It will require significant growth being achieved and ultimately the market legal status to be maintained, for this to work,” Deutsche analysts stated.
“Given how nascent the prediction markets industry is and the potential volume that it could one day attract however, the potential rewards are also significant in our view, underlined by the $700m FY29 EBITDA implicit target at the upper end of the management incentive package.
“We think this is the calculated risk that management are taking.”
Has IG Group made the right prediction?
The combination of uncertain factors surrounding the deal contributed to a £2.60 drop off in IG Group’s shares on Friday – the day the acquisition was announced – as its stock fell from £17.10 to £14.50.
It is yet to recover and has continued its decline, sitting below the £14 mark at the time of writing, though the FTSE 100 constituent’s market cap is still over £4.6bn.
The note continued: “So as much as anything, whether one likes this deal or otherwise, to some extent it comes down to whether one backs management.
“If the deal does fail, then we think shareholders should rightly hold management fully responsible, with all the implications that entails.”
The two investment conglomerates clearly see more positives in this deal than the rest of the market, despite Deutsche’s warning that “the developments are unlikely to suit “sleep well at night” investors”.
Deutsche has set a price target of £20, while BofA has gone beyond that with a price objective of £24.18 as of 31 July.
BofA synergies point to Super App
Though cautious of regulatory exposures, BofA believes that the synergy led elements of the deal will allow IG Group to develop and bring to market a ‘Super App’ for modern financial audiences.
The super app strategy is not a new phenomenon, but one that is actively pursued by several US financial platforms, including Coinbase, Robinhood and SoFi, as firms in adjacent markets seek to consolidate trading, investing, payments and crypto trading with new predictions market trading on sports, entertainment and politics.
Should synergies become effective, BofA views the current deal value of Underdog as “justified at 2.4 x revenues and 7×1 annualised EBITDA”.
In essence, BofA underlines the “strategic upside of Underdog” as IG Group becomes exposed to a “high-growth market with clear complementary growth opportunities” that can be activated by the enlarged group.
Post-deal, attention will turn to the strategic execution of Underdog’s integration into IG Group, a process led by its founder and Chief Executive Officer Jeremy Levine and IG Group CEO, Breon Corcoran.
Corcaran is notably the former chief executive of Paddy Power Betfair.
The big question now is – can they turn the combination into a multi-billion business challenging top ranks of financial services and global gambling (or both)?
This is also far from the first time a major deal in the gambling space, or perhaps in this case a ‘gambling adjacent space’, has been met with a chilly reception from the markets and investors.
Genius Sports’ takeover of Legend back in February initiated a huge share price crash for the London-based, US-listed firm, yet its stock is now recovering and is closing in on double that of its 2026 low of $3.92.
Whether IG Group’s swoop for Underdog will take on a similar path is still unclear, but it certainly carries more of a risk given the lack of regulatory clarity around predictions in many jurisdictions, except Gibraltar of course.
Article coauthored with Ted Menmuir
