ESPN Apparently Selects Penn as Third Option, Analysts Lack Enthusiasm for Collaboration
On a Tuesday news update, Penn Entertainment declared a monumental shift in the sports betting industry, revealing a $1.5 billion, 10-year partnership with Walt Disney's ESPN. Penn will be allowed to use ESPN Bet branding on both their online and physical sportsbooks.
Furthermore, Penn Entertainment announced they had sold back Barstool Sports to founder David Portnoy for a meager $1. This sale follows less than a year after Penn completed a $550 million acquisition of the sports media property. This ending to ESPN's pursuit of a more tangible presence in sports betting occurs at a relatively lower price than the reported $3 billion they sought in the past while looking for a marketing deal.
Over the span of two days, whispers arose that Penn might not have been ESPN's top preference for a partnership. There is speculation that Penn wasn't even their second-choice provider. This speculation could potentially be part of the reason some industry experts aren't beaming with excitement upon hearing this news from "the world leader in sports."
Allegedly, ESPN would have pressured for an agreement with the prominent online sportsbook operator, FanDuel, or their longtime partner, DraftKings. The rumor mill suggests neither company would part with over $200 million annually in cash and stock, which was demanded by ESPN.
Though this partnership can be discontinued after three years if certain performance indicators aren't met, Penn will invest $150 million per year for the project while granting ESPN the right to potentially own nearly a quarter of their equity.
Wall Street Unimpressed: Penn's 'Hail Mary'
The announcement of the partnership sent Penn’s shares soaring but prompted a decrease in prices for DraftKings. However, Penn encountered numerous devaluations and lowered price targets on Thursday.
In a note to clients, Craig-Hallum analyst Ryan Sigdahl criticized Penn for their inability to attain value for their shareholders in the Barstool Sports sale. Despite the media entity being estimated at $660 million value in February, Sigdahl states it's challenging to justify this sale process. As the expert downgraded Penn to "Hold" from "Buy" and reduced their price target from $56 to $30, he questioned their deal with ESPN.
He also highlighted potential setbacks with previous instances of media intersecting with sports betting, including Penn/Barstool, FoxBet, MaximBet, Bally's regional sports networks, Sports Illustrated and 888, and Pointsbet and NBC.
Potential Gain but with Numerous Risks
During Penn’s second-quarter earnings conference call, CEO Jay Snowden outlined a desire to seize 20% of the US sports betting market by 2027 via the partnership with ESPN Bet.
It's an ambitious objective when recognizing that FanDuel and DraftKings control approximately 75% of the market and Penn has struggled to secure double-digit control in most states where they offer sports betting. Some analysts are hesitant about the potential of this agreement.
According to Truist analyst Barry Jonas, while the success potential for Penn/ESPN is considerable, there's a sizeable risk that won't fade quickly, and land-based trends are stable. Jonas also switches Penn to "Hold" from "Buy" and revises his price target downward to $30 from $33.
To summarize, Penn just made a surprising move in the sports betting world by hooking up with ESPN, but industry experts are cautious, citing previous strategic mergers between media and sports betting that haven't always been successful.
