ESPN-Penn deal comes as cable TV is slowing, sports betting growing: Reporter

ESPN and Penn Entertainment announced a blockbuster deal on Tuesday, as ESPN (DIS) makes its biggest push yet into sports betting. 'ESPN Bet' will launch this fall in 16 states where Penn (PENN) currently operates mobile sportsbooks. Bernie McTernan, Needham & Company Managing Director, and Alex Weprin, The Hollywood Reporter Media and Business Writer, join Yahoo Finance Live to discuss the deal, the sports betting industry, and what it means for Disney and Penn Entertainment.

Weprin said, "This is a big shift in strategy for ESPN to have their own branded sportsbook, but it is also a natural extension."

McTernan said, "This entity is sitting at Penn ... ESPN is going to benefit from it through that advertising commitment from Penn and the ownership of Penn stock."

Video Transcript

AKIKO FUJITA: ESPN and Penn Entertainment announcing a blockbuster deal on Tuesday that will see ESPN operate branded sportsbooks as they make the biggest push yet into sports betting. ESPN Bet will launch this fall in 16 states where Penn currently operates mobile sportsbooks. For more on what this new partnership means for both the media and sports betting landscape, we want to welcome in Bernie McTernan, Needham Company director, as well as Alex Weprin from "The Hollywood Reporter."

Good to have both of you on today. Bernie, I want to start with you on the structure of the deal. Penn Entertainment shares obviously getting a big bump on the back of this, but I'm curious how you look at how this was structured when you consider Penn paying $1.5 billion in cash to be able to use the ESPN name along with some of its key tools, including ESPN Talent.

BERNIE MCTERNAN: Yeah. No, it's a good question. And so I think what you're seeing the reflection in Penn shares today is really a raising of the bear case and the bull case. Market share gains is something that started out hot for Penn and Barstool when they first started but has certainly dwindled down.

And so I think when Jason Owen was on the call this morning and he was talking about being on the podium, that to us means a top three operator in the space talking about 10% to 20% market share. And that's why, I think, you're seeing the space react to broadly with Penn up quite a bit, and then DraftKings going the other way.

And that's what the market is debating right now where competition has certainly fallen off as an industry key debate but is emerging once again. And also don't forget Fanatics is going to be joining the list of online sports betting operators too for the upcoming NFL season

SEANA SMITH: Alex, this move here from Disney it certainly is a pivot. There have been long been rumors just about Disney, ESPN eventually venturing in to the sports betting space. But how does this-- why do you think or do you think this makes sense for Disney?

ALEX WEPRIN: Yeah, I mean, this is something they've been exploring for a little while now. In Bob Iger's first run as CEO he actually kind of dismissed the idea of ESPN getting into the betting business, but that's clearly changed in the last couple of years as sports betting has really taken off in the US.

So this is a big shift in strategy for ESPN to have their own branded sportsbook, but it is also a natural extension. You know, they already have sports betting content on their shows. Their anchors already talk numbers and metrics. So, you know, it makes some sense to kind of get a piece of that action and for their talent to be able to cash in as well.

AKIKO FUJITA: The timing of this, Alex, certainly interesting when you consider-- you can imagine Bob Iger is going to get a lot of questions of this on the earnings call today after the bell. When you think about ESPN struggles, its having to deal with cord cutting that has been hurting revenue. They've seen their costs go up as well. What does this piece mean in the grand scheme of things?

ALEX WEPRIN: You know, in the grand scheme of things, it's relatively small. It's $1.5 billion over 10 years. They get $500 million in stock warrants, so there's some upside if Penn does well. But if you think about it, you know, ESPN used to be the cash cow for Disney. We're talking billions of dollars a year in profit. So compared to the linear TV business, this is relatively small. However, it's a growth business. Cable TV is declining. Sports betting is growing. And so, I think, ESPN kind of wants to be in that area to kind of take some of that upside.

SEANA SMITH: Bernie, why do you think this is the right fit here for Penn when you talk about that upside and some of the excitement that we are seeing in the market today when it comes to the future of Penn? You had a buy rating ahead of this announcement. So are you rethinking your outlook are you even more bullish following this news?

BERNIE MCTERNAN: Well, one of the things that we've been bullish on with Penn is the convergence of sports betting and sports media. We thought Barstool was an attractive way to play out that thesis. And one of the things-- one of the reasons why Penn and Barstool their market share was lagging it was really a product problem.

And so they bought the score. Two years ago revamped their tech stack, and they've already rolled that out in the US. And that was something that we were excited about for this upcoming NFL season when Penn finally had more of a level playing field in terms of the tech stack.

But it's not going to be Barstool as that convergence play with media. It's going to be ESPN here. And I think just an important point on the structure as well just to add to remember that this entity is sitting at Penn. So the upside-- the market share gains that comes, the EBITDA and profitability revenue that accrues, that's all going to be accruing to Penn. And ESPN is going to benefit from it through that advertising commitments from Penn, and then also from the ownership of Penn's stock.

AKIKO FUJITA: Bernie, you mentioned some of the stock moves that we've been seeing not just from Penn but also competitors like DraftKings down significantly today. I mean, is that a move that makes sense? How do you think this Sportsbook stacks up against these other competitors who have their own content already in place?

BERNIE MCTERNAN: Yeah. No and so I think really the-- we need to see how the technology is. Because if this-- we've seen a bunch of different examples in the marketplace-- Penn, Barstool being one of them. NBC and PointsBet being another one of failed media convergence plays with online sports betting operators.

So what we're really looking forward to is the tech integration between the two platforms, meaning that if you're an ESPN fantasy sports user, how easy is it to then bet on sports? If you're checking your March Madness bracket, how easy is it to then bet on games through that app? And really a seamless consumer experience is what we'll be looking for and not just the link out, which is currently what DraftKings and Caesar has with ESPN where it's almost like an afterthought. They show the odds, but they're not really pushing you to bet in that seamless experience.

And so that would be the most interesting thing in terms of them being able to drive market share here because, I think, otherwise just having the ESPN brand-- I mean, DraftKings and FanDuel has spent a lot of money over the past decade making their brand synonymous with not only sports betting but sports more generally. And so it's not the same kind of David versus Goliath that it might have been a couple of years ago. The DraftKings and FanDuel brands are both huge.

SEANA SMITH: Alex, we're going to hear from Disney set to release their earnings in just about an hour from now. When it comes to the overall strategy and even beyond ESPN, because there's lots of talk just about what Iger is going to focus on, what is exactly the core here to Disney's business, how are you looking at that and some of the options that Iger has floated here in his recent interviews?

ALEX WEPRIN: Yeah. I mean, Bob Iger has been floating this idea of perhaps selling Disney's linear businesses which would include ABC and its TV stations, some of the cable channels like FX. In the case of ESPN, they're also looking for a strategic partner. Someone with money or distribution or content that can kind of help that business.

So, I think, we're all going to be listening for Bob to share any updates on that. Have they made any progress in finding partners or buyers? And how serious are they in terms of really selling some of these linear assets? It's worth remembering that Iger has floated a lot of ideas since he returned from return to the CEO role last year.

Some of them he's kept up with like acquiring Hulu from Comcast. Others he's abandoned or kind of moved on from like the strategic shift in general entertainment content. So I think we're going to be looking for an update on Bob and what the plans are for those linear assets and whether Disney really is a seller.

AKIKO FUJITA: And we'll be listening for that call as well after the bell today, again, Disney reporting their quarterly results. Bernie McTernan, Needham Company managing director, as well as Alex Weprin from "The Hollywood Reporter", good to talk to both of you today. Appreciate the time.