The Israeli who helped trigger the SPAC wave runs into trouble

DraftKings' launch on Nasdaq  credit: Shutterstock

Shalom MecKenzie is not well-known in Israel, but thanks to a SPAC merger last year, he is one of the country's  youngest billionaires.

Shalom MecKenzie is one of the youngest billionaires living in Israel, and one of the least known. According to the updated "Forbes" magazine billionaires list published in April this year, 44 year-old MecKenzie's net worth was $1.7 billion, putting him slightly below Colmobil chairman Shmuel Harlap in the rankings, and above Check Point Software Technologies Ltd. (Nasdaq: CHKP) co-founder Marius Nacht. MecKenzie was born in Bat Yam but spent part of his childhood in the US with his parents. He now lives in Savyon, and is married with four children.

MecKenzie leapt to the ranks of Israel's wealthiest after the company he founded, SBTech, a provider of technological solutions for online sports betting and gaming, was merged in late 2019 with US sports betting company DraftKings. In a three-way deal, the merged company became listed on Nasdaq though a merger with a SPAC, Diamond Eagle, at a valuation of $3.3 billion. In the merger deal, McKenzie became the largest private shareholder in DraftKings (Nasdaq: DKNG), with an 11.3% stake in the merged company.

Last month, however, MecKenzie's SBtech was the focus of a negative report by investment house Hindenburg, which specializes in taking short positions. The report has shaken DraftKing's share price since it was released.

The merger and the success

DraftKings was founded in 2012, and started out managing daily fantasy sports games in which surfers could bet on the performances of baseball players, and later on players in other sports. The company exploited a loophole in the law which did not define fantasy sports as gambling. The company's activity expanded following a decision by the US Supreme Court in 2018 that enabled other states, besides Nevada, to permit betting on sports results, which more than half the states in the US have now done.

DraftKings wanted to buy SBTech and form a merger that would give it control over the technology that operates Internet betting systems. After it was proposed a merger with SPAC Diamond Eagle, the idea of a three-way merger began to take shape, including a meeting in Tel Aviv between MecKenzie and Harry Sloan, the SPAC's sponsor, in June 2019.

The merger, which as mentioned took place in April last year, was received with enthusiasm, and DraftKings' share price shot up from a starting price of $10 to a peak of $72 in March this year. The addition of super-celebrity Michael Jordan and model Gisele Bündchen as investors and special advisers to the company contributed to the rise in the share price. In fact, the success of the DraftKings merger is pointed to as one of the causes of the flood of SPAC mergers on Wall Street in the past year.

MecKenzie founded SBTech in 2007. The company was registered in Gibraltar, and later operated as a company in the Isle of Man. SBtech's development activity is in Bulgaria and Ukraine, with administration in Israel and commercial support in London. At the time of the merger with DraftKings, SBtech employed about 1,200 people around the world. In 2018, it posted revenue of €94 million and a net profit of €26 million.

SBtech's customers are gambling operators, lotteries, casinos, and horse racing companies, to which it offers a system for managing sports betting, including marketing and other tools. Among the customers were the Czech national lottery, and the state lottery of Oregon. SBTech took a percentage of the income from gambling of the users of its technology.

According to the Hindenburg Research report last month, however, about half of SBTech's revenue came from websites in countries in which gambling was illegal, such as Vietnam, Malaysia, Thailand, China, and Iran, which is also subject to US sanctions. Gambling websites in these countries are operated by criminal gangs. According to Hindenburg, its report is based on interviews with former SBTech employees, Internet research, and examination of filings with the US authorities.

The report claims that in recent years SBTech has tried to conceal its activity in Asian countries where gambling is illegal, so that this activity will not harm its entry into the US market. The concealment was carried out, the report says, through the transfer of this activity to a connected company called BTi (which later changed its name to CoreTech), which also operated from Bulgaria. The connected company was set up by the person described in the repot as MecKenzie's right-hand man, and its CEO was an Israeli who had in the past managed a binary options platform.

Hindenburg Research's report, published in mid-June, led to a fall of more than 11% in DraftKings' share price, but the share price subsequently recovered, before falling again, among other things following reports of a string of US law firms planning to file class actions against the company on the basis of the Hindenburg Research report. On the other hand, there are also those who support the stock, such as stock guru Catherine (Cathie) Wood's ARK investment Management. ARK has even increased its investment in DraftKings since the affair broke; its holding in the company is estimated at $600 million.

As for MecKenzie, according to US Securities and Exchange Commission filings, between June 2020 and the publication of the Hindenburg Research report, he sold shares to the tune of $588 million. He has transferred most of his remaining holding, worth about $1 billion, to a trust for his family.

Responses

No response was forthcoming from Shalom MecKenzie. On behalf of DrafKings it was stated to 'Globes" that "The complaint filed against DraftKings, which has not been served, piggy-backs on a report recently published by a short seller with a financial incentive to drive down DraftKings’ share price. Prior to our business combination with SBTech, DraftKings conducted a thorough review of their business practices and we were comfortable with the findings."

Published by Globes, Israel business news - en.globes.co.il - on July 18, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

DraftKings' launch on Nasdaq  credit: Shutterstock
DraftKings' launch on Nasdaq credit: Shutterstock
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018