Analyst Predicts Enhanced Profits for Caesars and DraftKings Due to Penn/ESPN Collaboration
It's challenging to judge the impact given the downward trend observed in the stocks on Wednesday, but Caesars Entertainment (NASDAQ: CZR) and DraftKings (NASDAQ: DKNG) could potentially profit from Penn Entertainment's (NASDAQ: PENN) new sports betting collaboration with ESPN.
This is according to B. Riley analyst David Bain, who, in a note to his clients, suggests that while the initial reaction might be that of a competitor gaining an edge over Caesars and DraftKings, both these companies might gain from being freed of their contracts with ESPN, which were established in September 2020.
On the surface, it may seem as though a more competitive interactive competitor is emerging, but Bain believes that CZR and DKNG might be released from ongoing partnership payments to ESPN, enabling them to focus on more cost-effective marketing channels. He had previously mentioned that ESPN was a drain on the profitability of customer acquisition for both companies.
Shares of Caesars and DraftKings didn't react positively to the Penn-ESPN news. By the end of trading, Caesars had dropped by 1.3%, while DraftKings was down by nearly 10%. In contrast, Penn experienced a 8.78% surge.
Potential EBITDA Benefits for Caesars, DraftKings
Penn surprised everyone Tuesday afternoon when it announced a deal with ESPN where it would pay the network $1.5 billion over 10 years for the usage of ESPN Bet branding during that period, with the option of another 10 years. Additionally, Penn granted ESPN equity optionality, potentially giving it control of up to a quarter of Penn's shares.
Penn anticipates this partnership could generate $500 million to $1 billion in EBITDA for its interactive division. However, it's uncertain whether they can achieve these figures. Bain seems doubtful.
Bain comments, "Though we're uncertain about PENN's strategy and thus do not express an opinion on the deal, we find it interesting that PENN teamed up with ESPN after other companies have stated that they gained less value than anticipated from their ESPN partnerships."
He further suggests that some links with ESPN are detrimental to partner's EBITDA and that this applies to Caesars and DraftKings.
Other Benefits for Caesars, DraftKings
Rumors had circulated earlier this year that Caesars might like to eliminate its agreement with ESPN, and that DraftKings could acquire Caesars to break free of their obligations.
With Penn's collaboration with ESPN, Caesars is likely to be freed from its commitments without significant effort. Moreover, DraftKings can save money as they can't pursue Caesars' ESPN deal and may be compelled to end their arrangement with ESPN.
Bain concludes, "We believe the deal between PENN and ESPN frees CZR and DKNG from any further obligations with ESPN. Therefore, in our opinion, the deal is advantageous - at least in the short term - for both CZR and DKNG."
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Source: www.casino.org
