Analysts Voice Criticism of Penn Entertainment After ESPN Deal

Posted on: August 10, 2023, 12:54h. 

Last updated on: August 10, 2023, 12:54h.

On Tuesday, Penn Entertainment (NASDAQ: PENN) caused a stir in the sports wagering industry by announcing a 10-year, $1.5 billion partnership with Walt Disney’s (NYSE: DIS) ESPN. The deal will result in the use of ESPN Bet branding on Penn’s online and brick-and-mortar sportsbooks.

Penn National
Penn Entertainment CEO Jay Snowden in a 2020 CNBC interview. The company swung big in a deal with ESPN, but analysts aren’t impressed. (Image: CNBC)

In addition, Penn revealed that it has sold Barstool Sports back to its founder David Portnoy for just $1, shortly after completing a $550 million acquisition. This partnership with a regional casino operator marks the end of ESPN’s pursuit of a major entry into the sports wagering industry, albeit at a significantly lower price than previously sought.

Speculation has arisen that Penn was not ESPN’s top choice for this deal, with FanDuel and DraftKings reportedly preferred options. However, it appears that neither company wanted to meet ESPN’s desired cash and stock commitment of $200 million annually. Despite this, Penn is committed to investing $150 million per year in the partnership, giving ESPN the chance to eventually own nearly a quarter of its equity.

Rumors suggest that ESPN’s preference was to strike a deal with FanDuel or DraftKings, but both companies declined to meet the sports media entity’s financial demands.

Although the partnership with ESPN can be terminated after three years if certain metrics are not achieved, Penn is prepared to allocate $150 million annually to the endeavor. This commitment also grants ESPN the right to eventually own a significant portion of Penn’s equity.

Analysts Skeptical of Penn’s Bold Move

Following the news, shares of Penn surged while DraftKings saw a decline. However, the casino operator has since experienced multiple downgrades and price target cuts.

One analyst, Ryan Sigdahl of Craig-Hallum, criticized Penn for not extracting any value for shareholders in the sale of Barstool Sports, a media entity estimated to be worth $660 million as of earlier this year. Sigdahl downgraded Penn’s stock and lowered the price target.

It is hard to defend this sale process as maximizing the asset’s value for shareholders,” wrote Sigdahl.

Sigdahl also noted that previous examples of media entering the sports betting industry have delivered more failures than successes. This includes ventures such as Penn/Barstool, FoxBet, MaximBet, Bally’s and Sinclair’s regional sports networks, Sports Illustrated and 888, and Pointsbet and NBC.

Potential for Success, But Challenges Remain

During Penn’s second-quarter earnings conference call, CEO Jay Snowden expressed his goal of achieving a 20% share of the US sports betting market by 2027 through the ESPN Bet brand.

While this is an ambitious objective, it must be acknowledged that FanDuel and DraftKings currently dominate 75% of the market, while Penn has struggled to reach double-digit market share in any of the states where it operates. As a result, analysts remain cautious about the Penn/ESPN partnership.

Barry Jonas, an analyst at Truist, stated, “PENN’s upside from ESPN Bet could be material, though we see sizable execution risks that may not resolve soon — while land based trends just look stable.” He downgraded his rating on Penn’s stock and adjusted the price target accordingly.

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