Penn, ESPN appear 'as tied up' as possible in $2B deal: Analyst
Penn Entertainment and Barstool Sports have split, as ESPN (DIS) and Penn (PENN) strike a $2 billion sports betting deal. Macquarie Senior Gaming, Lodging & Theaters Analyst Chad Beynon joins Yahoo Finance to discuss the aspects of the ESPN-Penn partnership, as well as what the deal means for the future of live sports gambling and the future of the industry.
Beynon also broke down the Penn Entertainment earnings call. Beynon said, "They (Penn) believe they can get $500 (million) to $1 billion of profits ... so this is a huge decision for the company and the path of the stock over the next couple of years."
Video Transcript
JULIE HYMAN: A major shift for the gaming industry. Penn Entertainment and Barstool Sports have gone their separate ways. Founder Dave Portnoy announcing he once again owns 100% of Barstool. Penn, on the other hand, has entered into a new partnership with ESPN. The two brands are going to launch their own branded sportsbook dubbed ESPN BET this fall.
With more on this, we're joined by Chad Beynon, Macquarie senior gaming lodging and theaters analyst, our Josh Schafer, who's been covering this story also with us. So Chad, what do you think here? I mean, this sort of hit us big yesterday when the news came out. It was a surprise, even though ESPN has been sort of moving in the direction of some kind of branded sportsbook for a while. Is this the right partnership for Penn and for ESPN?
CHAD BEYNON: Sure. Thanks, Julie. Yeah, huge surprise here. On the first side of the surprise, Penn has been committed and kind of backing up the personalities from Barstool, and obviously, that came to an end, as you mentioned here. In terms of ESPN, it has been out there that ESPN has been looking for a partner for several years. They had arrangements with Caesars and DraftKings, really just kind of on the media commitment side. Neither one of those companies went all in with Disney or ESPN.
And this deal is an all-in deal. Up to $2 billion of commitments for 10 years. And on the earnings call, which just ended about 20 minutes ago, Penn CEO Jay Snowden talked about why this is the right fit, and they believe that they can get $500 to $1 billion of profits that's currently about what the company does on the land-based side. So this is a huge decision for the company in the path of the stock over the next couple of years.
JOSH SCHAFER: And Chad, what does this mean for the industry as a whole? You take a look at DraftKings shares, down about 9% on this news. I think there's sort of two reads you could get. You could say this is a massive move for the industry and sort of like a changing of the guard, maybe in some sense of how we're going to look at this. But maybe that's too big of a read, too, and people may be overreacting to the news. I'm curious what the read is.
CHAD BEYNON: Sure, Josh. Yeah, the skeptics will continue to point to some of these media partnerships have not worked out as expected. The Fox situation, Fox originally expected to get 10% to 15% market share. Then you had PointsBet tying up with NBC. They were expected to get double-digit market shares as well. Everyone was looking at the UK model and what Sky Bet had built over there and the success.
So after we saw some of these media deals not work out as expected, I think there's been just more questions around if this is the right way to acquire customers, maintain customers, and are you able to hit the goals. In terms of DraftKings being down right now, you know, I do think that it's probably a quick reaction here. DraftKings has been up 180% year to date. They had a great quarter, generated 70 million of profits in Q2 when they were expected to lose money.
FanDuel reported this morning they generated hundreds million. So between those two companies, look, they're still over 70% market share. I think they've done incredible things on the tech side and the customer retention side to certainly state their case that they're not going to lose market share to ESPN BET.
BRAD SMITH: Does the ESPN Penn deal make an ESPN spinoff from Disney a no-brainer for Bob Iger?
CHAD BEYNON: My colleague Tim Nollen covers Disney, but as he's written about and I think Bob Iger has talked about, I think this is something that many expected could be in the cards here. It is a small deal as a percentage of Disney's total market cap. I was looking at that this morning. You still have a market cap with Disney in the hundreds of billions of dollars. And this is a nice commitment, and they do have some economics on the tail end if it's successful.
From what Penn said on their call this morning, it sounds like they do have a lot of control with the personalities with the content, and there will be a board seat from ESPN on Penn's board. So certainly, it looks like they're tied up as close as they could be, and that could lead to a change for Disney's.
JULIE HYMAN: The tie-up maybe was a little too close when it came to Barstool and Penn. I mean, was Dave Portnoy just too toxic to be partnered with a publicly-traded company? And is there any chance that anybody else would touch Barstool at this point?
CHAD BEYNON: Yeah, that was part of our positive thesis on Penn, and it had been trading in this $25 range even if it wasn't going to work out with Barstool. We still thought that there was value there, and Penn could actually sell this off for $500 to $1 billion get their money back and then some. Parting ways without getting an inflow on the financial statements was a little bit of a surprise. They still would benefit in a Dave Portnoy Barstool sale to somebody else. Penn would receive 50% of the proceeds--
JULIE HYMAN: But who else would buy it, Chad?
CHAD BEYNON: There's certainly some players that are currently in the space that have been talked about. But now, after we're seeing the regulation friction with these individuals, that makes it much more unlikely. It just sounds like the team over there at Barstool wasn't able to operate as they had for years if they were in a highly regulated industry like we are on the land-based gaming side. So yeah, there's not many likely partners on the sports betting side.
The media business has done well. That's true in $250 million of annual sales. When Penn originally bought into the deal three years ago, it was doing about $100 million of sales. So the straightforward media business has doubled even though it's not making a profit. So I would think it would be a traditional media partner that would make more sense than a sports betting partner.
JOSH SCHAFER: And Chad, would the ESPN BET deal they were talking-- Penn was talking on the call about how it might be a little bit different than some of the past media deals. You pointed to earlier that they're going to have more control over the talent. It seems like the talent might be calling out ESPN BET maybe a little bit more than they did with Caesars or DraftKings. I'm just curious if this deal feels different to you than what ESPN has done in the past from that sense.
CHAD BEYNON: Yeah, Josh. A little bit, but I still think that ESPN has actually done a pretty good job pointing people toward sites and obviously giving their take and some of the interesting parlays. Other networks have done a really good job. The TNT and the Charles Barkley team has been pretty successful in that. So there will probably be more of that.
I'm not sure if ESPN was holding back from the commentators actually previewing a game with all the interesting same-game parlays. So I'm sure some of that integration will be made ahead of the football season. And Penn said the launch should be around November. I think that'll be a key point, and it sounds like that was a big difference between the media groups that had been successful versus ESPN, which was providing a little bit more of just the odds and not as much kind of in the details in terms of where people are placing their bets right now.
BRAD SMITH: Chad Beynon, Macquarie senior gaming lodging and theaters analyst-- that's a lot-- alongside Yahoo Finance's Josh Schafer. We know you've got a lot to really busy up your day from here, so Thanks so much for taking the time, Chad.
CHAD BEYNON: Thanks. Appreciate it.
BRAD SMITH: Absolutely.
