Penn Entertainment, ESPN Unveil Significant Sports Betting Deal

Penn Entertainment (NASDAQ: PENN) made waves across the American sports betting world today as it announced its intention to sell off Barstool Sports and enter into a $1.5 billion deal with Walt Disney’s (NYSE: DIS) ESPN to utilize the ESPN Bet trademark.

legal criteria, Penn Entertainment, a regional casino operator, will enter into a massive sports betting agreement with the sports media giant ESPN. As part of this agreement, Penn Entertainment will pay ESPN $1.5 billion over 10 years to use the ESPN Bet branding, with the option for an additional 10 years in the initial term. In exchange, ESPN will receive a $500 million warrant that will let them purchase around 31.8 shares of Penn, vesting ratably over the 10-year term. Additionally, ESPN will gain various “marketing services, brand and other rights” from Penn. The sports media giant and casino operator anticipate this relationship could add anywhere from $500 million to $1 billion in long-term adjusted EBITDA to Penn’s interactive gaming unit, provided ESPN Bet meets the U.S. legal criteria.

ESPN could receive up to 6.4 million bonus warrants to purchase additional PENN common shares should its online sports betting (OSB) market share meet certain performance thresholds. This would result in the Disney unit potentially owning 38.2 million shares, equating to almost a quarter of the gaming company’s shares outstanding. Penn’s market capitalization is currently $3.84 billion, and $1.5 billion is being paid to ESPN. This is higher than the $3 billion ESPN reportedly sought in licensing talks with sportsbook operators two years ago. Furthermore, ESPN has the choice to either assign a non-voting observer to Penn’s Board of Directors or, on the completion of the third year of the agreement, “name a Board member subject to satisfying gaming regulatory approval(s) and a minimum ownership threshold”. Penn has recently shed Barstool Sports.

Penn Swiftly Rids Itself of Barstool Sports

Penn Entertainment, formerly known as Penn National Gaming, announced that it was selling 100% of the equity in Barstool Sports back to founder David Portnoy after nearly a year since the acquisition. In January 2020, the casino operator paid $163 million in cash and equity to take a 36% stake in the sports and pop culture blog. The agreement authorized an additional purchase of half of the stake for another $62 million payment, which could lead to a full buyout of the media property for $450 million. In total, Penn Entertainment paid an estimated $500 million for Barstool.

Rumors of a potential Barstool sale by Penn have been in the air for a while, so it’s not unexpected to find the deal happening in an unbelievably fast timeframe. Penn will henceforth be shedding the Barstool branding for its sportsbooks and replace it with “ESPN Bet”.Also,its Canadian sports betting business will stay with the same name of “Score Bet”. On the other hand,the operator’s iGaming platform will henceforth be known as “Hollywood Casino”. Although,the financial terms of such transaction have not been revealed publicly, but it has been clear that Penn owns 50% of the proceeds from any potential sale of Barstool or monetization through other methods. Furthermore,it’s yet unclear what other odds and ends this association might end in.

Other Interesting Odds and Ends

Roughly a month before the three-year anniversary of ESPN signing deals with Caesars Entertainment (NASDAQ:CZR) and DraftKings (NASDAQ:DKNG), news was revealed of the Penn/ESPN partnership. As for Caesars, there is speculation that they may choose to leave the ESPN deal to save money. On the other hand, DraftKings executives have expressed a positive outlook on their relationship with ESPN and Disney owns 6% of the non-voting equity in DraftKings, which they gained from 21st Century Fox in 2019. Although it has not been officially confirmed, Penn’s payment and ESPN’s equity in DraftKings seem to hint that the deals with Caesars and DraftKings may soon be coming to an end.

Jay Snowden, CEO of Penn, expressed in a statement that the company’s ability to utilize the top sports media brands of both the United States and Canada, such as ESPN and theScore, along with their recently launched sports betting app, will enable them to expand their digital reach significantly and launch ESPN Bet into an advantageous spot in the market. Snowden went on to say that the Company expects to build considerable adjusted EBITDA in their Interactive Segment and this will lead to robust free cashflow create value for shareholders.