DraftKings is raising $1 billion through convertible notes, money that the company plans to use for operations and possible acquisitions.
DraftKings is already flush with cash—it finished 2020 with $1.8 billion on its balance sheet—but U.S. sports betting has become a race for customer acquisition that requires deep pockets for marketing and promotions. There’s also the possibility of “mergers and acquisitions and products or technology investments,” the company said in a statement on Monday.
DraftKings stock dropped as much as 3% on Monday morning following the announcement.
A DraftKings spokesperson declined to comment on specific goals or motivations. Company executives have said in the past that the proper time to raise capital is when the money isn’t needed for something pressing.
DraftKings is selling $1 billion in convertible notes to institutional investors—and providing them the option to buy another $150 million worth in the next three weeks. The notes will be used for general corporate purposes and are unsecured—that is, backed only by DraftKings’ good faith. Generally speaking, corporate notes refer to obligations lasting fewer than 10 years, while bonds are longer term.
Convertible notes and bonds have been very desirable by institutional investors in the market over the past year, since they offer both the security of a bond with the potential upside of a stock. That’s allowed businesses like DraftKings to raise money at favorable prices. Terms of the DraftKings offering haven’t been publicly disclosed but a recent convertible bond offering from Peloton featured underlying stock that was priced at a 63% premium to its shares on the stock exchange. In January, terms on new convertible bonds were the priciest since data has been compiled in 2013, according to Barron’s.
One wrinkle in the deal is that DraftKings is devoting a portion of the proceeds to establishing a capped call. A call is an option that gives the right to buy the underlying stock at a certain price in the future, and the cap means that it would limit some, but not all, conversion of the bond into equity. Since the company’s stock has already risen more than 300% in the 11 months since it went public by SPAC, it allows DraftKings to limit the creation of new shares, which would dilute existing shareholders and, theoretically, at least, negatively affect the share price.
In its Investor Day presentation last week, DraftKings laid out its long-term projections for sports betting and iGaming in the U.S. and Canada, and how much market share the company could capture. It calculated a mature market as a $5 billion-$7.3 billion gross revenue opportunity. (For reference, the company’s revenue in 2020 was $615 million, and its guidance for 2021 is in the $900 million-$1 billion range).
