Moody's Analyst Praises Positive Impact of ESPN Deal on Penn Entertainment
Recently, Penn Entertainment made an announcement that they will be investing $1.5 billion over a span of 10 years to make use of ESPN's "ESPN Bet" brand across their online and retail sportsbooks. In addition to this, Walt Disney's unit, ESPN, will be given the opportunity to acquire a significant portion of their shares. Moody's Investor Service views this move as a positive for Penn, a regional casino operator, as it will bring potential benefits for the gaming company in the long run.
Although Penn might have to bear the expense of marketing and customer acquisition costs during the fourth quarter and next year to make ESPN Bet a success, the collaboration could yield positive returns over time. "We anticipate a period of ramping up, which will also necessitate additional spending on marketing, promotions, and customer acquisitions," mentioned Moody's. "As a result, we foresee Penn's leverage rising from 4.7x to 5.0x in terms of company-calculated net leverage. Over time, these expenses should go down as ESPN Bet matures, grows, and acquires a stronger market share." Penn believes that their interactive segment has the potential for adjusted annual EBITDA ranging from $500 million to $1 billion, depending on North American market share for online sports betting and iCasino.
As of May 31, Penn, the operator of Ameristar, had $1.27 billion in accessible cash and cash equivalents and a total debt of $2.68 billion. Their credit grade stands at a "B1," which positions them in the junk territory, while their outlook for corporate debt is considered stable.
Details of the Penn-ESPN Deal
It is rumored that Penn wasn't easily chosen for the marketing pact by ESPN. Some market analysts have mixed opinions about the deal. A second reason for the mixed reactions is the shedding by Penn of Barstool Sports, which was originally valued at $550 million, only to be sold back to its founder, David Portnoy, for a mere $1 million. Some believe Barstool could be worth more than that, with estimates of the company's worth being around $600 million. Although Penn has the right to receive half of the economic benefits if Portnoy sells the company again, the lack of any shareholder gain from the initial transaction is seen as negative.
Portnoy has stated that he has no plans to sell Barstool again, suggesting there are no immediate options through which Penn can benefit from the agreement with the media company. Furthermore, ESPN could own a considerable portion of Penn's shares. "Penn will also grant ESPN an estimated $500 million in warrants to purchase 31.8 million of their common shares over a 10-year period," stated Moody's. "ESPN could receive additional warrants if ESPN Bet reaches certain US online sports betting market share benchmarks. In exchange, ESPN has the option to appoint one nonvoting observer or, after three years, designate a board member with the approval of gaming regulators and a minimal equity stake."
Walt Disney sold its stake in Penn's competitor, DraftKings, for $90 million. This move could possibly be related to the agreement between Disney and Penn.
Penn Must Invest Heavily to Capitalize on ESPN's Brand
Though the ESPN brand is highly recognized in the world of sports, Penn still needs to invest substantial resources to maximize its potential. They have not spent as much on marketing as their competitors BetMGM, DraftKings, and FanDuel in the field of sports wagering. To testify for this, Penn's current US sports betting market share is relatively low. However, their recent partnership with ESPN comes with certain expenses for Penn to effectively capitalize on the ESPN brand.
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Source: www.casino.org
