Tuesday, April 1, 2014

MGT Capital Acquires 100% of DraftDay.com - Furthering Daily Fantasy Website Portfolio

I've been writing about MGT Capital for several months now, monitoring the companies news & events. MGT is a mish-mash of gambling related intellectual property, patents, websites and other technology. Some of it I believe is mostly hogwash (real money gaming license in New Jersey) or worthless (Real Deal poker dealing technology), but the company has been making a major push into the daily fantasy sports space ... which is a highly competitive space.

This category of websites has been deemed legal in the majority of US states and has drawn the attention of venture capital money. DraftKings.com raised $24,000,000 last November, FanDuel.com raised $11,000,000 in January 2013, and MGT themselves bought a 65% stake in FanThrowdown.com for around $2.7 million cash/stock deal about 1 year ago.

What a difference a year makes.

MGT recently announced that they had purchased 100% of DraftDay.com for 'only' around $800,000 dollars cash/stock - which is a small amount compared to what they paid for a smaller percentage of FanThrowdown - which still is not as active as DraftDay. It's also a small fraction of the valuation placed on 3 other sites during fundraising rounds.

I actually play daily fantasy sports on all the sites I mention above, so here's where I'd rate the competition - and it shows how important this deal was/is for MGT Capital.

Top Sites
DraftKings - FanDuel - DraftStreet


Lower Tier
... everyone else

Why would DraftDay sell for only a small fraction of FanThrowdown & what other sites are worth?

  1. MGT probably overpaid for 65% of FanThrowdown a year ago
  2. DraftDay must have been bleeding money
With competitors raising $20+ million dollars, it's very difficult for the mid-lower tier daily fantasy websites to compete. Sites like DraftKings offer fairly slick iPhone smartphone app and massive $1,000,000 guarantee prize pool contests where winners can win life changing money in one day. This allows them to attract & retain new players.

It's possible DraftDay was dangerously short on cash - which would cause them to draw from the 'players pool' of money in order to maintain operations. A similar thing occurred to (during it's day) one of the worlds largest un-regulated poker sites - Full Tilt Poker. The company had to use player money for marketing and daily operational costs in order to cover a shortfall in player deposits which weren't processed, but credited to players. The situation at DraftDay is likely not as complicated, but surely they were close to broke, as $800,000 cash/stock for the website seems like a small amount compared to the valuations that were achieved by 4 other websites in the past year. 

That could pose some challenges for MGT as they now have to manage the DraftDay asset while maintaining a controlling interest in FanThrowdown. Additionally the DraftDay asset will likely need some further investment in order for it to be a positive cash-flow generating asset for MGT Capital. Shareholders of MGT are seeing the company make an effort to expand & improve the daily fantasy area of the companies portfolio - even if they haven't proven they can be successful yet with prior purchases. The company seems too risky to me, and the disclosure of financials for the company is not particularly detailed - but is certainly staying on the speculative stock watchlist while they make moves in their industry.

1 comment:

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