Sports-betting company DraftKings (DKNG 0.87%) is now selling 40 million shares in an upcoming public offering. Previously it proposed 33 million shares, but strong demand led it to upsize the offering. The new offering is priced at $40 per share -- slightly less than where the stock traded at the time of the announcement.
Some analysts think highly of the move, as it will add cash to DraftKings' balance sheet. But it won't add as much cash as you might think. Here's why.
Image source: Getty Images.
Early investors selling
Upstart companies are often funded by venture capitalists and similar private funding sources prior to going public via an IPO. The returns for these investors can be stellar, but they'll frequently sell their stake once a company is on the stock market. This allows them to take their gains and move on to other upstarts.
Certain DraftKings stockholders will sell 24 million shares in the proposed offering -- the majority of shares offered. At $40 per share, that's $960 million. There's also an option for up to 6 million additional shares 30 days after the offering. For its part, DraftKings is selling 16 million shares for $640 million minus any fees.
DraftKings is burning cash. Its net cash from operating activities was negative $737,000 in the first quarter of 2020. But it also only had $158,000 in cash on the balance sheet, a clear incentive for the company to raise fresh capital. Given the appreciation of its stock price, it does make sense to obtain those funds via the public market rather than accruing long-term debt.
