Penn Entertainment took a $2 billion gamble on establishing ESPN Bet through ESPN’s parent company, Disney, but the juice has not been worth the squeeze, and both parties may enact their opt-out clauses after the third year.
Let’s Make a Deal
Penn Entertainment CEO Jay Snowden has been infatuated with the world of mobile sports, so much so that he spent $650 million to buy the Barstool Sports media empire with the sole intention of creating Barstool Sportsbook, which would be frequented by the “bro” customers who routinely visit Barstool Sports.
However, the ink was barely dry on the completed sale when another shiny object attracted Snowden less than six months later. ESPN was interested in doing a deal with a gaming company to use its tag letters if the price was right. Snowden immediately struck a deal with the Disney-owned company for $2 billion, but there was a pricey caveat to the agreement.
The caveat was divesting itself of Barstool Sports, the media empire Snowden purchased for over half a billion dollars six months earlier, and it had to dissolve Barstool Sportsbook so as not to compete with the new ESPN Bet.
The move was made, and a quick sale of Barstool Sports back to its founder, Dave Portnoy, for $1 and the guarantee that should Portnoy ever sell Barstool Sports, Penn Entertainment would be entitled to 50% of the proceeds. Portnoy has vowed never to sell.
Not Meeting Expectations
Once founded, ESPN Bet immediately established a 7% share of the market, but that quickly eroded to where it now holds approximately a little over 2% of the mobile sports betting market, and investors have seen their stock tumble from $128/share in 2021 to where it stands now at $17.83.
Needless to say, the natives are restless, and HD Vora, one of Penn’s major investors, has been vocal about its displeasure. So much so that it recommended three boards of directors, but Penn only offered two positions: a business mechanic that has been challenged legally by HG Vora, but the case has not yet been heard.
However, HG Vora was successful in getting two of its nominees on board, as Johnny Hartnett and Carlos Ruisanchez were both dutifully elected.
“Our legal checks suggest HG Vora’s allegations of fiduciary obligation violation have some merit, though outcome is still difficult to predict,” said Stifel analyst Jeffrey Stantial. “For now, we forecast status quo and view approved governance changes favorably, in particular as PENN navigates the forthcoming ESPN opt-out option.”
Will Penn Pull the Plug on ESPN Bet?
But the future of ESPN Bet is very much in doubt under the governorship of Penn Entertainment. Stantial remarked, “On the Interactive front, we see increasing probability PENN exits the ESPN Bet relationship, though likely priced into shares already with overly conservative expectations for long-term iCasino market share.”
As HG Vora stated on its website, a return to Penn’s focus on its land-based casinos would be preferable to losing more money on its online gaming experiment.
“Since the beginning of 2020, Penn has invested heavily in online sports betting, committing more than $4.3 billion of shareholder capital—nearly double Penn’s entire equity market value today—to several value-destructive acquisitions and partnerships,” says HG Vora Capital Management’s website.
Whether Penn stays in the online sports betting game is unclear at this point, but they have approximately 18 months to decide on its future in the industry through ESPN Bet.
