DraftKings Unveils $1B Buyback, Bettor Surcharge in High-Tax States

Posted on: August 1, 2024, 05:10h. 

Last updated on: August 2, 2024, 09:50h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

DraftKings (NASDAQ: DKNG) told investors Thursday that it could repurchase up to $1 billion of its shares and that it will implement a surcharge on bettors in several states with high sports wagering taxes.

DraftKings stock
A DraftKings billboard appears at Times Square in New York City. The company announced a surcharge on bettors in four states and a $1 billion buyback plan. (Image: NASDAQ)

The Boston-based gaming company said the surcharge will be applied in states that have elevated sports wagering levies and multiple operators. Illinois, which recently implemented a graduated sports betting tax scheme that raised rates on the largest operators there, is one of the four states in which DraftKings will apply the surcharge. New York, Pennsylvania, and Vermont are the other three.

We plan to implement a gaming tax surcharge in high tax states that have multiple mobile sports betting operators on January 1, 2025 which could drive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) upside on an annual basis,” said CEO Jason Robins in a statement.

DraftKings forecast 2025 EBITDA of $900 million to $1 billion — a forecast that does not include the potential benefit from the bettor tax.

DraftKings Surcharge Plan Met with Derision

In its investor presentation, the gaming company noted the surcharge will only be applied to winning wagers and it will be treated as a separate transaction when winning bets are paid. DraftKings added that the tax will be made clear to clients as it will appear on bet slips.

“The surcharge will be fairly nominal to the customer. In Illinois, for example, it will amount to a low to mid-single digit percentage of the Net Winnings a customer would previously have received,” wrote Robins and CFO Alan Ellingson in a letter to shareholders.

The news set off a firestorm of criticism on “Sports Betting X (formerly Twitter)” with some users saying the plan is an attempt by DraftKings to mitigate its tax exposure on the back of clients. Other critics believe the surcharge scheme could prompt current DraftKings bettors to take their business elsewhere.

Some even went so far as to say black market bookies in New York are cheering the news. As of Thursday, DraftKings is the first major online sportsbook operator to announce such a surcharge.

Buyback Telegraphed, but Still Good News

While the surcharge commanded plenty of attention following DraftKings’ second-quarter earnings report, the $1 billion buyback wasn’t overlooked. Though analysts had increasingly telegraphed some form of shareholder rewards from the company was in the offing, it’s worth noting this is the first share repurchase plan in DraftKings’ four-plus years as a public firm.

Companies aren’t legally bound to repurchase the entire dollar amount announced to investors, but if $1 billion of the stock is bought back, it could foster confidence among shareholders, some of whom have been critical of DraftKings’ insiders being frequent sellers of the stock.

In the earnings statement, Ellingson said the gaming company is excited about its free cash flow trajectory. As of the end of the second quarter, DraftKings had cash and cash equivalents of $815.88 million. Total liabilities stood at $2.91 billion, down from $3.10 billion at the end of last year.