DraftKings, FanDuel Play High-Stakes IPO Game as Fantasy Sports, Yahoo! Face Investigation
I've previously argued on Real Money that DraftKings and FanDuel are in a troubled position competing against each other in the fast-growing but low-margin Daily Fantasy Sports arena.
Things only got worse recently when New York Attorney General Eric Schneiderman filed an injunction to prohibit the two companies from selling their services in the state.
On Tuesday, we learned that the AG was extending his investigation to Yahoo! (YHOO) , the No. 3 daily fantasy sports player.
The companies won't get their day in court until next week. The stakes are high. If the court sides with the AG, DraftKings and FanDuel can't operate in one of the biggest states in the union. It might lead to other states deciding to follow.
Even though Yahoo! is likely disappointed to be dragged into this political mess, make no mistake: these legal moves threaten the two private market leaders DraftKings and FanDuel the most.
These two companies have raised hundreds of millions of dollars. They have enormously powerful partners in the sports business world that can't let them fail. And, in the case of DraftKings, it is committed to spending hundreds of millions of dollars over the next couple of years on Disney's (DIS) - Get Report ESPN.
Now is the time where these companies want to be seeing their revenues and profits taking off. They're valued at over a billion dollars each. The next logical step is an IPO to help cash out earlier investors and raise even more capital for themselves.
Government regulation. Declining growth. A cool IPO market. These are big hurdles that the companies will have to overcome. (For Yahoo!, DFS is such a small speck in its overall business that it could be shut down tomorrow and it would not be a big deal.)
Look at Square (SQ) - Get Report IPO'ing this morning and having to cut its offering price to fill the order book. If this type of frosty mood continues, an IPO might not even be an option for these two as stand-alones.
As I argued before, I think the best bet for these two companies would be to merge now. They're not going to fail and there's too much money behind them to be stopped from doing business. They'll get the chance to sell their stuff. However, they could be headed toward government licensing. I just don't think they'll be able to make it as two companies.
What happens if they don't and the AG is successful in blocking them in New York? Just how much cash does each of them have on hand and how much are they burning? What other private investors are going to step up and give them more money at the terms they got on their last financing?
They'd be better off just merging now, cutting costs, and then prepping for an IPO where they can fill back the coffers with more cash.
Editor's Note: This article was originally published on Real Money at 10 a.m. on Nov. 19.
This article is commentary by an independent contributor. At the time of publication, the author was long YHOO.