Decrying “numerous failed investments and destruction of shareholder value,” the Donerail Group called out Penn Entertainment management and directors in an open letter this morning. The document, signed by Managing Partner Will Wyatt, called for Penn to sell its casino portfolio, in part to recoup interactive losses.
The letter, in its broader aspects, echoed a recent demand by K&F Growth Capital that Bally’s Corp. stanch online bleeding by jettisoning interactive operations in favor of concentrating on brick-and-mortar casinos. By contrast, Donerail requested that Penn be put on the block altogether.
Wyatt argued that Penn’s casino assets alone would bring as much as $6.9 billion on the open market, compared to the company’s current enterprise value of $4.1 billion. He called the valuation “conservative” compared to the 10.6 times cash flow that Penn paid to acquire Pinnacle Entertainment six years ago.
Wyatt contended, “Penn has been unable to disintermediate the online sports betting landscape,” which led to a 80 percent decline in Penn’s stock price during the 2021-2024 period.
Donerail criticized Penn’s board for “an obstinate and heightened level of confidence in the company’s management team,” as well as “exorbitant amounts of money” paid to CEO Jay Snowden “notwithstanding the continued earnings misses, guidance cuts, and stock-price underperformance.” The investors didn’t, however, call for Snowden’s dismissal, deeming him a good casino operator.
Penn’s 2000-2019 strategy of agglomerating regional casinos, 43 in all, was applauded for marketing and operating them well, causing Penn equity to appreciate 3,000 percent. Donerail’s sticking point was Penn’s divergence into online sports betting (OSB). Igaming went unmentioned.
The letter cited “significant strategic” failures involving Barstool Sports and ESPN Bet, as well as attempting to compete with FanDuel and DraftKings. “To shareholder detriment, PENN has not been able to demonstrate the management expertise necessary to build a business that could become a formidable competitor in the online sports betting oligopoly. The company’s inability on each interactive initiative has resulted in a loss of market confidence and the stock being dragged down with it.”
Pointing a finger of blame at Snowden, Wyatt wrote that Snowden’s four-year tenure had coincided with a 40 percent decline in Penn’s stock price, while shares of the overall gaming group appreciated 60 percent. “It is rare that we have ever seen such a sustained and underwhelming underperformance under the same CEO without intervention from a company’s board of directors.”
Continuing in the same vein, Wyatt asked whether board members were “really just riverboat gamblers, content with doubling down after each loss—of shareholder capital, of management confidence, of board credibility.” He then concentrated on three areas of perceived mismanagement.
Barstool: Wyatt took issue with Snowden’s “fundamentally flawed” $551 million acquisition of Dave Portnoy’s company, recently sold back to its founder for one dollar. Wyatt called the results “lackluster” and pegged the pre-tax loss at $1 billion.
theScore: This Canadian firm had revenue of under $25 million a year when Penn snapped it up for $2.1 billion, an indication of “just how drastically the PENN investment thesis had changed under Mr. Snowden’s watch.” This was allegedly underscored by Penn’s stated determination to acquire theScore’s technology more than to capture its revenue. Not only has theScore’s management team departed, Wyatt observed, but $200 million in annual cash flow has not been realized.
ESPN Bet: “After its first foray into an online sports gambling platform underwhelmed, PENN thought it wiser to simply give Barstool away in favor of forming a new partnership with ESPN, as the company sought, yet again, to create an entirely new online sports betting business from scratch,” resumed the letter. It faulted Penn for “no improvement” in its execution of OSB and for escalating negative returns on investment, including a half-billion dollars (estimated) for 2024.
Wrote Wyatt, “The continued deflating guidance misses represent a biting uncomfortable contrast to not only the stable cash flow profile that the company enjoyed for years.” He weighed $4 billion in interactive investments against the value of Penn’s brick-and-mortar assets, faulting management for continuing to pursue its OSB strategy.
Donerail then turned its ire on Snowden’s pay package, $99.3 million for the 2020-2023 period. It was described as beyond “what we would view as reasonable, given the objectively poor business and stock-price performance.”
Wyatt supported these arguments with the information that Snowden had received a -100 score from Institutional Shareholder Services (“the worst possible score”) for the perceived disconnect between Penn’s stock performance and its CEO’s compensation. Also, Penn had the second-smallest market capitalization of any of the 12 companies in its self-reported peer group, which included Las Vegas Sands and Electronic Arts.
The letter went on to approvingly cite the “As You Sow” shareholder-advisory newsletter, which had named Snowden as the third-most-overpaid CEO in the S&P 500. Wrote Wyatt, “Mr. Snowden’s compensation was deemed to be so gratuitous, As You Sow chose to use PENN as a case-study of wrongdoing in its report.” He also cited BlackRock, Vanguard, State Street Global Advisors, and CalSTRS as sharing his view.
Snowden’s own insider transactions, which included selling 750,000 Penn shares for $45 million, were turned against him, as was the timing of these transactions, said to have followed “deals and his own seemingly optimistic comments.” Asked Wyatt, “How does the board have confidence in the CEO’s vision if the CEO doesn’t appear to have confidence in himself?”
Citing a Raymond James analyst’s view that Penn’s casinos were “the only leg of the stool supporting the stock,” Donerail then made its case for monetizing them. It hailed the regional portfolio for its “relative stability” compared to “flashier Las Vegas.” It further argued that resilient and “durable casino assets” were being “dwarfed by the company’s failed interactive strategy.”
Donerail argued that a sale of Penn could unlock value at a time when the company’s peers are pursuing inorganic growth strategies, “largely due to the financial stability, scale, and diversified geographic revenue base of the company’s regional casino portfolio.” The terrestrial portfolio “not only remains intact, but has a stronger foundation than ever and continues to be highly valuable.”
Deriding ESPN Bet as Penn’s “newest bright and shiny object,” Donerail and Wyatt concluded by asking “that the board take a moment to reflect objectively on the past four years of execution, assess the shareholder capital that has been destroyed, and recognize that shareholders may simply be tired of continued gambling on uncertain outcomes.”
