During Wednesday’s earnings call, there was a single question about Penn Entertainment’s second-quarter results.
That’s unheard of, given the nature of such calls, but given the seismic events of the past 24 hours – namely, Penn’s agreement with ESPN to launch ESPN Bets and its divestiture of Barstool Sports – is understandable.
“I plan to focus my comments this morning primarily on this transformational agreement and the future launch of ESPN Bets,” said Penn Entertainment CEO Jay Snowden during his opening remarks.
He then punted on the first question, posed by Truist Securities analyst Barry Jonas, who asked if Snowden would like to comment on how the agreement transpired.
“Not really,” Snowden said, adding he’d prefer not to be too “inside baseball” on the agreement.
“I would just say that as we got to know the folks at ESPN, led by (President) Jimmy Pitaro, it felt good,” Snowden said. “I’ve been blown away by the shared passion for wanting to be the best at everything they do. ESPN Bet is no different. They’ve been working behind the scenes for some time and the excitement, energy,d the passion are all very clear when you meet with them. The alignment on what the future will look like is very exciting. But I’ll leave it at that.”
Per the agreement, Penn will make $1.5 billion in cash payments to ESPN paid over the initial 10-year term and grant ESPN approximately $500 million of warrants to purchase approximately 31.8 million Penn common shares that will vest ratably over 10 years, in exchange for media, marketing services, and brand and other rights provided by ESPN. That’s a $2 billion wager on the “worldwide leader” in sports, as ESPN touts itself, raising Penn’s sports-betting profile.
Needham & Company analyst Bernie McTernan noted that the initial reaction from Wall Street has been positive, but added that there was pushback on how much market share the agreement would garner and that “other partnerships between media operators and online sports bettors haven’t worked historically.”
Snowden agreed it was a fair question, but stated that none of the other partnerships involved ESPN.
“Why I know it’s going to work is one, it’s exclusive,” Snowden said. “Two, it’s ESPN-branded, which I think is very important. It’s fully integrated. It includes access and endorsements from top ESPN talent. And really importantly, this is a strategic relationship. So you think about how this is going to be more valuable for ESPN over time, as helping us achieve higher levels of market shares. The higher levels of market shares make the warrants they own of Penn valuable and if you get over 20 percent, they become many more warrants and much more valuable. And if we’re having conversations around the dilutive effect of the warrants over 20 percent, that’s a great day for everybody.”
On the divestiture of Barstool Sports, Snowden said that Penn’s initial partnership with the company “felt great at the time.”
But given the outspoken nature of Barstool and its founder, Dave Portnoy, “It just became obvious to both parties that there’s probably only one natural owner of Barstool Sports. And that’s Dave Portnoy. Being part of a publicly held, highly regulated, licensed, gaming company, it became clear that we were an unnatural owner.”
ESPN Bets is expected to launch midway through the NFL season. A few analysts noted that there were questions posed by investors if that was too late in the season, given that the halfway point for the NFL happens in November.
Snowden said this scenario is reminiscent of when Penn launched Barstool sportsbooks in October 2020.
“We came out of the gate pretty strong back then at over 10 percent of market share,” Snowden said, adding that the November opening will be beneficial, because “it’s not going to get lost at the launch of football season.
“The football season is so noisy,” Snowden said. “Everybody’s spending like crazy, trying to drive top of the funnel on the acquisition side. I like how this plays out. Now, it’s a product-led decision for us to launch with ESPN in November. Strategically, I like it because we’re going to be out there launching at a time when, maybe with everyone else, new customers have burned through those promotional dollars on first-time deposit match and we’re going to be mid-season offering something that probably isn’t being offered by others or it’s already been utilized with the other competitors. We like it and we’re fine with this being a show-me story. We’re happy to share results and you’re going to see those real time in November, heading into 2024.”
While the agreement between Penn and ESPN is for 10 years, there’s a potential termination after three years if certain market thresholds haven’t been met. Snowden said those thresholds have not been disclosed and will not be.
“But we’re not doing this deal to be a four- or five-percent market-share player,” Snowden said. “That’s not going to be acceptable for us. It’s not going to be acceptable for ESPN. So you should assume that if those are the ranges you’re in, it’s not going to work out long term.”
For 2023’s second quarter, Penn Entertainment reported revenues of $1.67 billion, a year-over-year increase of 2.9%. Net income was $78.1 million compared to $26.1 million during the second quarter of 2022.
