• Michael Rubin's sports platform company Fanatics is divesting its 60% stake in NFT company Candy Digital, according to an internal email obtained by CNBC.
• Fanatics, who previously held the majority share of Candy Digital, will be selling its interest to an investor group led by Galaxy Digital, the crypto merchant bank led by Mike Novogratz.
• Sports NFTs have seen a drop in valuation and popularity amid the broader 'crypto winter,' impacting companies like Candy Digital and Dapper Labs.

Michael Rubin's sports platform company Fanatics is divesting its 60% stake in NFT company Candy Digital, according to an internal email obtained by CNBC.

Fanatics, who previously held the majority share of Candy Digital, will be selling its interest to an investor group led by Galaxy Digital, the crypto merchant bank led by Mike Novogratz, which was the other original founding shareholder, according to the email.

Fanatics declined to comment.

Candy Digital was founded in June 2021 in the middle of the sports NFT boom, competing with companies like Dapper Labs in the digital sports collectible space. One of its first efforts came out of a multiyear licensing agreement with MLB to produce nonfungible tokens, which included an exclusive Lou Gehrig NFT. It also released digital collectibles with Netflix's Stranger Things, WWE, and several Nascar teams.

However, akin to the broader NFT market, sports NFTs also saw a decline amid the 'crypto winter' that has seen the value of nearly all digital assets plummet. Dapper Labs, the company behind NBA Top Shot and NFL All Day digital trading platforms that ranked No. 9 on last year's CNBC Disruptor 50 list, laid off 22% of its company in November.

Candy Digital had raised a $100 million Series A round in October 2021, valuing it at $1.5 billion at the time. Investors in that round included SoftBank's Vision Fund 2, Insight Partners, and Pro Football Hall of Famer Peyton Manning, according to previous CNBC reporting.

It is unclear what Fanatics received for its stake in the company, but Rubin wrote "Divesting our ownership stake at this time allowed us to ensure investors were able to recoup most of their investment via cash or additional shares in Fanatics – a favorable outcome for investors, especially in an imploding NFT market that has seen precipitous drops in both transaction volumes and prices for standalone NFTs."

Rubin cited several factors for Fanatics' divesture in the email, which he wrote was a "rather straightforward and easy decision for us to make for several reasons."

"Over the past year, it has become clear that NFTs are unlikely to be sustainable or profitable as a standalone business," Rubin wrote. "Aside from physical collectibles (trading cards) driving 99% of the business, we believe digital products will have more value and utility when connected to physical collectibles to create the best experience for collectors."

In January 2022, Fanatics acquired Topps trading cards for roughly $500 million after also acquiring the rights to produce MLB trading cards, severing a nearly 70-year partnership between Topps and baseball's top league.

Fanatics raised $700 million in fresh capital in December, aiming to use that new money to focus on potential merger and acquisition opportunities across its collectibles, betting and gaming businesses. It also pushed the company's valuation to $31 billion.

The company, which started as an e-commerce platform selling team merchandise to sports fans, has looked to expand across the entire sports ecosystem. The company is also weighing an initial public offering, and Rubin recently met with more than 90 internet, retail and gaming analysts from various Wall Street firms, where he spoke of Fanatics' growth plans, according to previous CNBC reporting.

Fanatics, a three-time CNBC Disruptor 50 company, was ranked No. 21 on last year's list.

Here's the full email Rubin sent to Fanatics staff on Wednesday:

Team Fanatics –

Happy New Year. I hope everyone had a chance to recharge and spend quality time with family and friends during the holidays, and that your 2023 is off to a great start.

As we're getting back into the swing of things, I wanted to share some news with all of you. Effective immediately, Fanatics has divested our approximately 60% stake in Candy Digital. We have sold our interest in the NFT company to an investor group led by Galaxy Digital, the other original founding shareholder. When we looked at all the factors on the table, this was a rather straightforward and easy decision for us to make for several reasons.

Business Model – NFTs will most likely emerge as an integrated product/feature and not as a standalone business: Over the past year, it has become clear that NFTs are unlikely to be sustainable or profitable as a standalone business. Aside from physical collectibles (trading cards) driving 99% of the business, we believe digital products will have more value and utility when connected to physical collectibles to create the best experience for collectors. To that end, we already hold a broader and more significant set of NFT and digital collectibles rights within our Fanatics Collectibles business that came with our trading cards rights (NFL, MLB, NBA and more), which we are seamlessly integrating with the world-class physical collectibles rights we currently have. Ultimately, our goal is to grow the number of sports collectors. Connectivity between physical and digital collectibles will be the most powerful way to create an emotional resonance and enduring success for NFTs and their collectors.

Investor Relationships: Taking this immediate action not only makes sense for the strategic direction of Fanatics, but also allows us to maintain the integrity of the relationships with our investors. The investors in Candy bought into the vision not because of NFTs or Candy itself, but because of our track record at Fanatics. This proven track record is a result of your hard work and our alignment on the mission to build the leading global digital sports platform. Therefore, it was imperative to us to protect their investment as the market and financial environment changed. Divesting our ownership stake at this time allowed us to ensure investors were able to recoup most of their investment via cash or additional shares in Fanatics – a favorable outcome for investors, especially in an imploding NFT market that has seen precipitous drops in both transaction volumes and prices for standalone NFTs.

Cultural Integration: Similar to how quickly we mobilize when the right strategic acquisition or partnership presents itself, we move even quicker when we realize things aren't working. One of our core values – One Fanatics…Win As A Team – is integral to our success and only works when we can leverage the collective intelligence and expertise of all of our teams and colleagues. Unfortunately, we never achieved full integration of Candy within the Fanatics environment or culture due to shareholders with competing objectives and goals. Our culture of building, growing and winning as a team is what makes this company special, and we were not willing to compromise on this front.

We are 100% confident that this was the best long-term decision for Fanatics and our partners and we look forward to growing our digital and trading cards business together under Fanatics Collectibles with the incredible rights we have across the NFL, MLB, NBA, NCAA, WWE, UFC, F1, UEFA, Disney and more.

Happy New Year to all,

Michael Rubin

CEO, Fanatics