Penn Entertainment's Struggles in the Sports Betting Industry Beg for a Possible Sale, Suggests an Investor
A letter from the Donerail Group, a long-time investor in Penn Entertainment (NASDAQ: PENN), urges the board of directors to consider selling the company due to its failures in online sports betting and the overcompensation of CEO Jay Snowden.
Donerail's managing partner, Will Wyatt, states in the letter to Penn's chairman, David Handler, that the gaming firm squandered billions of dollars of shareholder funds in the past four years to establish a foothold in online sports betting. Additionally, the repeated misses in guidance and the continued investment in its Interactive projects, regardless of past results, has severely damaged the management team and board's credibility.
Donerail's concerns are well-founded. Penn invested about $551 million to acquire Barstool Sports in 2020, aiming to leverage the brand and support its online and retail sportsbooks. However, this acquisition failed to yield significant returns. In August, Penn sold Barstool back to its founder, David Portnoy, for just $1, while striking a costly $1.5 billion deal with ESPN (NYSE: DIS) to use its branding for the Penn-operated ESPN Bet mobile betting app. Penn also granted ESPN $500 million in equity warrants. Despite marginally better performance compared to Barstool Sportsbook, Penn has not been able to make substantial inroads in the market share held by DraftKings and FanDuel.
Penn Should Consider a Sale, Claims Donerail
The letter from Donerail caused a rally in Penn's stock, with a 19.62% increase in share price and more than four times the daily average volume. However, this upswing differs from the norm.
Wyatt highlighted to Handler how Penn's shares plunged by 80% over the past three years, closing at $17.50 - a dramatic decrease from the all-time high of $142 in March 2021. He blames the slide in part on missteps at both the board and management levels.
Citing one possible solution, Wyatt suggests a sale of the company’s assets, which he believes could generate substantial value for equity holders. Penn's market capitalization stands as a substantial discount compared to the $13.35 billion average value of its industry peers.
Donerail does not identify specific potential suitors for the gaming company, but notes there is significant interest among industry players to grow through acquisitions.
Professional investors have shown keen interest in Penn over the last few months. Greenlight Capital announced a "medium sized" stake in Penn earlier this year, while HG Vora said it acquired an 18.5% stake in Penn's outstanding shares in December 2022 and demanded board seats to drive change. Despite this increasing popularity, Penn's stock fell by almost a third since the beginning of 2023.
Donerail Criticizes Snowden's Compensation
Wyatt also emphasized the excessive compensation of CEO Jay Snowden, stating he received $99.3 million in total pay from 2020 to 2023, a period riddled with share price declines. Wyatt cited Instructional Shareholder Services (ISS) which deemed Snowden's compensation wholly misaligned with shareholder interests. He also pointed out that leading institutional investors like BlackRock, Vanguard, State Street Global Advisors, and CalSTRS have voted against Snowden's compensation, but no change was implemented by Penn's compensation committee.
As You Sow, a prominent shareholder advisory firm, recently named Snowden the third-most overpaid CEO among the S&P 500 companies. However, Penn was removed from the index in September 2022.
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