Draftkings (DKNG) dramatically overvalued? Sanity check

by doctoreleven217

As many of you know, Draftkings went public Friday through a reverse merger with DEAC. When announced last November, the deal was valued at $3.3 billion. In order to hold $400 million cash as required by the terms of the deal, DEAC sold stock which was originally priced at $10 per share. The value of those shares rose to ~$17 by market close yesterday driven by people wanting to invest in Draftkings before the deal was finalized. These DEAC shares are being swapped today 1:1 for DKNG shares.

Problem is, DEAC’s S1/A (describing the deal – link below) filed with the SEC yesterday described a large increase in the supply of shares of stock available following the merger. On the 2nd page DEAC is listed as having 44.7 million shares of stock and 3 million warrants. In the “description of securities” section on page 150 it says the following:

After giving effect to the Business Combination, New DraftKings will have approximately 313 million shares of Class A common stock outstanding (assuming no redemptions) and approximately 394 million shares of Class B common stock outstanding (assuming no redemptions).

For the original deal valuation of $3.3 billion be true, the share price with a 313 million share supply should be ~$10 per share, which is exactly what DEAC offered to pay for shares that did not wish to be converted to shares of DKNG at the shareholder meeting yesterday. Today, DKNG stock opened at over $20 per share which indicates a deal value of over $6 billion. How is this possible when it seems existing shares are being diluted 6-1?

At Charles Schwab (and many other brokerages as well), DKNG shares have not yet been provided to sell. On Friday, the orderbook was incredibly thin, but once new shares hit the market large holders have the liquidity they need to dump at an absurd valuation.

Buy all the puts? Someone please tell me why I am wrong?

Deal prospectus – SEC filing:

sec.report/Document/0001104659-20-049986/#b_020

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.