Hindenburg Research, an investment research firm with a focus in activist short-selling which also publishes reports on alleged fraud by other companies, has chosen DraftKings (DKNG) as its next target. Shares were down around 7% after Hindenburg announced that it would be taking a short position on the American sports betting operator.
“This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price," a statement Yahoo Finance received from a DraftKings representative read. "Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings. We do not comment on speculation or allegations made by former SBTech employees.”
In its report titled “DraftKings: A $21 Billion SPAC Betting It Can Hide Its Black Market Operations,” published this morning, Hindenburg describes the company as having experienced “one of the more successful deals in a recent wave of SPAC transactions marred by scandal and bad actors." DraftKings, which went public in early 2020 after a merger between DraftKings, its SPAC, and SBTech, a gaming technology company based in Bulgaria, has since experienced gains in its share price of around 400%.
Daniel Adam, senior analyst at Loop Capital Markets, told Yahoo Finance Live that SBTech, which Hindenburg states accounts for 25% of DraftKings' total revenue, actually only accounts for around 10% today. The figure of 25% was true back in early 2020 when DraftKings had just undergone the de-SPACing process to go public, Adam added.
"If you look at the logic behind the SBTech acquisition, it never had anything to do with external customers based in Asia or elsewhere, but more to do with integrating that technology into DraftKings' vertical tech stack, which would differentiate them from virtually every other player in the industry," Adam said.
Adam says that if any of the allegations of past "black market" dealings by SBTech or DraftKings were true, state regulatory gaming commissions would have inquired about them. Citing his time covering the stock as an analyst, Adam ultimately describes DraftKings as "very credible and not misleading."
"I can't comment intelligently as to whether or not these allegations that were made relating to business dealings that occurred five and 10 years ago at SBTech are actually true, but the reality is—fast-forward to today—that that piece of the business is pretty irrelevant in the grand scheme of things for DraftKings," Adam added.
According to its report, Hindenburg estimates that approximately 50% of SBTech’s revenue is generated from markets in which gambling is outlawed, citing DraftKings’ SEC filings, correspondence with former employees, and other supporting documents.
“Unbeknownst to investors, DraftKings’ merger with SBTech also brings exposure to extensive dealings in black-market gaming, money laundering and organized crime,” the report read. “Based on conversations with multiple former employees, a review of SEC & international filings, and inspection of back-end infrastructure at illicit international gaming websites, we show that SBTech has a long and ongoing record of operating in black markets.”
The report then goes on to cover the operations of BTi/CoreTech, which Hindenburg describes as a “distributor entity” with around 50 employees which SBTech uses to “distance itself from its black-market dealings.”
“Illicit customer relationships were shuffled into a newly formed ‘distributor’ entity called BTi/CoreTech, with ~50 SBTech employees shifted across town to the new entity,” the report read.
Note: This article has been updated to include a statement from DraftKings.
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV
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