U.S. regulators might block the merger of FanDuel and DraftKings

Staff at the U.S. Federal Trade Commission have raised serious competition concerns with the proposed merger of FanDuel and DraftKings, according to three sources familiar with the matter, raising the specter that the government agency could soon block the deal.

As originally proposed, the combination would grant FanDuel and DraftKings — which rank as the top-two daily fantasy sports websites in the United States — perhaps more than 80 percent of that particular market. That’s a significant foothold in the industry, and it’s weighed heavily on some legal staff at the FTC, which began its customary antitrust review of the merger shortly after it was announced in November 2016.

For now, a recommendation by some at the FTC to sue to stop the deal is only an initial step in the process: It would still fall to the agency’s sitting commissioners to vote on the matter, which could happen this week.

This time, however, a legal challenge could prove especially tough to bring. At the moment, the five-member FTC only has one Republican chairman and one Democratic commissioner, and if they split in their vote, the deadlock would allow the FanDuel-DraftKings deal to proceed unimpeded.

Asked about the merger, a spokeswoman for the FTC declined to comment. Spokeswomen for both FanDuel and DraftKings also declined to comment on Wednesday.

The two daily fantasy sports companies — which used to despise one another and combined raised hundreds of millions in funding for competing TV commercials — found themselves in the mood to merge last year after state and federal regulatory troubles morphed into major business threats.

At one point, FanDuel and DraftKings had to cease operating in New York, while states like Alabama, Mississippi and Texas ruled that daily fantasy sports sites ran afoul of local restrictions banning online gambling. The U.S. Congress also threatened to intervene.

At the FTC, though, the question at issue in their merger isn’t whether the companies, which take weekly bets on athletes’ performances, qualify as games of skill or chance -- it’s if the combination of DraftKings and FanDuel threatens competition.

The answer may hinge on how the FTC defines the market that the two websites serve.

Other major media companies, like Disney’s ESPN and Yahoo, offer fantasy sports products to consumers, but FanDuel and DraftKings have dominated the daily fantasy market, where users can win actual cash prizes. If the agency only looks at the merger and its effects on daily fantasy sports, FanDuel and DraftKings are poised to face major antitrust roadblocks.

But the two companies in recent years have unveiled other products, like season-long fantasy football, that puts FanDuel and DraftKings in competition with a broader array of companies. To some extent, that’s helped them “buttress the contention that they’re not just simply in the space for daily fantasy sports,” said Daniel Wallach, a lawyer at Becker & Poliakoff in Florida who works on gaming and sporting law.

“From DraftKings and FanDuel’s perspective, the broader the marketplace, the better it [looks] for their proposed combination,” he explained to Recode. “The more persuasively they can make that case, the more likely they [are to] survive antitrust scrutiny.”

Additional reporting by Kurt Wagner.

This article originally appeared on Recode.net.