GigaMedia Strategic Alliance with Mangas Gaming: Is this a Good Deal?

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GigaMedia Announces a Strategic Alliance with Mangas Gaming

From a December 16, 2009 GigaMedia Press Release:

HONG KONG, Dec. 16 /PRNewswire-Asia-FirstCall/ -- GigaMedia Limited (Nasdaq: GIGM) announced today an exciting strategic alliance with European online gambling leader Mangas Gaming by way of a sale of 60 percent of GigaMedia's online gambling software business to Mangas.

Mangas Gaming is jointly owned by former media boss Stephane Courbit's Lov Group and the world renowned Monte Carlo Casino owner Societe des Bains de Mer de Monaco, controlled by the Principality of Monaco. Mangas has an extensive European gambling portfolio, including BetClic, Expekt, and Bet-at-Home, together offering sports betting, poker and casino services to over four million registered users in over 25 countries.

The strategic alliance will see Everest Poker joining the Mangas Gaming family as its primary poker site. Everest Poker, powered by GigaMedia's software, is one of the world's most popular poker sites and the official "felt" sponsor of the World Series of Poker. Everest Poker was named Poker Operation of the Year in 2007 and 2008 by industry journal e-Gaming Review.

"We are thrilled to have Everest Poker join the Mangas Gaming family with its media savvy and land-based casino shareholders and well known platform of gambling brands," stated GigaMedia CEO Arthur Wang. "By partnering with Mangas, we can realize the full value of our poker and casino software business and share the enormous upside of this powerful combination in the large European community."

"This strategic alliance will create an online gambling powerhouse in Europe with top poker, sports betting and casino offerings," stated GigaMedia CEO Arthur Wang.


[conference call December 21, 2009: GigaMedia, Other News for Investors]

Is This a Good Deal?

GigaMedia Player Growth Potential

This complex deal, which will no doubt be easier to understood after the December 21, 2009 conference call, initially looks like a win-win for all sides. GigaMedia gets much needed online player growth potential from the up to four million existing registered Mangas Gaming players. Although it isn't known what percentage of the four million Mangas Gaming players will be interested in poker, it is important to remember GigaMedia's current active player base (from the GIGM Q1 Conference Call Transcript): GigaMedia adjusted poker player growth potential estimated to be upto 70%

During this 1stQ our poker platform had approximately 183K active real money customers, virtually unchanged from the previous quarter. During the quarter we added approximately 45K new real money poker players, up 3% quarter over quarter. As expected, poker revenue declined both year on year and Q on Q.

Four million versus less than 187,000 means that if GigaMedia gets 10% to 15% of the Mangas Gaming four million players to play some poker in Q1, 2010, then GigaMedia will be reporting Q1 2010 active real money customers on the order of 600,000 to 800,000 active customers. With GigaMedia's 40% share of the new strategic alliance, the adjusted growth in active players would be on the order of 187K in Q1 2009 to 240K to 320K in Q1 2010. That is, with this deal, GigaMedia has a reasonable potential to report an adjusted active player growth on the order of 28% to 70% on a year over year basis. Very nice in the current online gaming environment.

GigaMedia Converts Everest Business Unit Investment into Cash

GigaMedia recovers $100M in past development costs and improves cost structure From its initial investment in Grand Virtual, the Boston based software development team supporting the Everest brand software, GigaMedia has made significant investments in building the Everest business unit. The Mangas Gaming strategic alliance allows GigaMedia to recover up to $100M of this investment now with the potential to recover much more in the future.

From a GigaMedia perspective, the adjusted future cost basis is reduced by up to 60% assuming costs in the strategic alliance are split on the basis of ownership percentage.

GigaMedia Bottom Line

GigaMedia is cashing in some of its past poker/casino software investments for cash plus a share of a potentially much bigger online gaming pie. By reactiving growth, GigaMedia stays alive in the consolidating online poker market. This deal avoids an alternate future like that Cryptologic share holders are currently faciing where its poker revenue basis is shrinking as sites move to bigger networks (e.g. Sun Poker, amoung others, moved from the Cryptologoic Network to the iPoker Network.)

Mangas Gaming Eyes The US Market

Mangas Gaming is well positioned to enter the world's best online poker market

The GigaMedia software development unit is based in the US and has never been involved in any US based gaming. Although PartyGaming might claim that they have settled for allowing US players to gamble online, very few other major poker brands are as perfectly clean as the GigaMedia Everest brand. Most of the current online poker software products (e.g. PokerStars, FullTilt, etc.) are likely to have future trouble operating in a regulated US market. In short, the Cote d'Azur is nice, very nice, but there is no poker market in the world that matches the US poker market.

One might summarize the Mangas Gaming motivation as: America I Like You:

The great British humorist, P.G. Wodehouse, thought so highly of Americans that he spent much of his writing life among them in New York, weaving magnificent plots that usually involve a flutter or two. His high opinion of Americans is widely shared by the online gambling industry. The reason is that Americans have risk in the blood. The question to these determined optimists is never whether to bet but rather how much. And most often they win. Their success is no mystery. It comes from the fact they work like the devil. At everything. U.S. poker players, in particular, are the stuff of legend. No Texas Hold 'Em table is complete without them! When America bellies up to the baise, one feels in the air that unmistakable crackle of commerce and general goodwill.


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