By Liana B. Baker and Diane Bartz
(Reuters) - The two largest daily fantasy sports companies, FanDuel Inc and DraftKings Inc, are in early-stage talks to merge, people familiar with the matter said on Monday, as the industry faces a crackdown by U.S. states over whether it runs illegal gambling.
A deal could reduce legal costs for the two companies, which have had to defend themselves against legal challenges as well as lobby for legislation to make the games legal in states that have declared them illegal.
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It could also lower their advertising budgets. Both have spent aggressively in the past few years as they battled for market share against each other. Bernstein research estimated that 59 percent of total U.S. TV ad revenue growth in the third quarter of last year was from spending on daily fantasy football ads.
The sources said no deal is certain. They asked not to be identified because negotiations are confidential. FanDuel declined to comment. DraftKings declined to comment and a spokesman added that "these rumors have existed for as long as both companies have been in operation."
The multibillion-dollar fantasy sports industry has drawn increased scrutiny since last year, with the attorneys general of several U.S. states including New York, Illinois and Nevada questioning the legality of the games.
The merger of two market leaders such as FanDuel and DraftKings would usually attract the attention of antitrust authorities, said Andre Barlow, an antitrust expert with the law firm Doyle, Barlow and Mazard PLLC.
But regulators will also need to decide how easily other competitors could enter the fantasy sports market, Barlow added.
FanDuel and DraftKings agreed in March to halt their business in New York, banking on a legislative path to make the games legal after a months-long fight with the state's attorney general, Eric Schneiderman.
The state's Senate and Assembly are both considering bills on the games, but have yet to pass final legislation.
Other states are also pursuing regulation. In March, Virginia passed a bill making it the first U.S. state to regulate fantasy sports.
Fantasy sports started in 1980. The games have surged in popularity as advancing technology made it easier to create fictional teams of athletes from professional sports leagues, and to monitor their statistics.
Daily fantasy sports, a turbocharged version of the season-long game, has boomed over the past decade. Players draft teams in games played in just one evening or over a weekend.
Bloomberg News first reported on the merger talks between FanDuel and DraftKings.
(Corrects plural of attorneys general in fifth paragraph.)
(Reporting by Liana B. Baker in San Francisco and Diane Bartz in Washington, D.C.; Additional reporting by Michael Erman in New York; Editing by Will Dunham, David Gregorio and Simon Cameron-Moore)