ESPN Bet Deal Leads To Portnoy Paying $1 To Buy Back Barstool From Penn

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As expected, Penn Entertainment‘s second-quarter earnings call was almost entirely about its new partnership for ESPN Bet.

One of the more interesting notes was found in Penn’s 10-Q, filed after the market closed Wednesday afternoon: Penn sold Barstool Sports back to Dave Portnoy for $1.

Barstool agreed to certain noncompete terms and must share 50% of gross proceeds with ESPN if Portnoy sells it. Portnoy said he will never sell Barstool again.

Penn takes a hit for the disposal, though it is a non-cash impact. The pre-tax non-cash loss to be realized in the third quarter should be between $800 million and $850 million, which is inclusive of $705 million to $720 million in goodwill and intangible asset writeoffs.

There is also the reversal of a net deferred tax liability of approximately $115.9 million.

Penn shares spike on ESPN Bet

The new platform is expected to launch in November, “certainly” by Thanksgiving, CEO Jay Snowden told analysts and investors on the conference call. That date is being driven by the product, he added, since it is being reskinned with ESPN’s branding and Penn needs to add more servers for the expected bump in volume from its previously expected relaunch by the start of NFL betting with Barstool.

Penn investors seem to love the switch from Barstool’s albatross to the hopeful wings of ESPN, for which Penn is shelling out more than $2 billion in cash and stock. The stock closed up 9.1% Wednesday at $27.10.

The stock was at a volume 49 million, more than 15 times its average daily volume.

Is Penn win a DraftKings loss?

It appears DraftKings stock holders are not happy with missing out on an ESPN deal.

DraftKings stock was down around 9% as of 1:30 pm on more than double its average daily volume.

Bloomberg reported last October that DraftKings and ESPN were on the verge of a “large new partnership.”

Penn expects double-digit share for ESPN Bet

Much of what is expected for the ESPN Bet product will be discussed at an investor day that should come at some point in December, Snowden said. He wants to have a few weeks of the new app operating to share results with analysts and investors.

For now, the investor deck concerning the transaction details three market share scenarios and their subsequent adjusted EBITDA for 2027. Penn estimates a total addressable market of $15 billion for sports betting and $14 billion for online casino:

Adj. EBITDASports betting shareiGaming shareBlended adj. EBITDA margin, GGR
$500 million10%8%16%
$700 million15%12%17%
$1 billion20%16%18%

Snowden would not say what kind of market share is needed to avoid ESPN breaking the 10-year deal off after three years, which is permitted in the deal. That 10% online sports betting market share is around where both Penn and ESPN would get “excited” about ESPN Bet’s progress, Snowden said.

The year includes an out for ESPN after year seven as well.

Market share stagnation ‘crazy talk’

Snowden called it “crazy talk: to believe US sports betting market share is set in stone:

“It’s interesting, I often times look back to the UK market and you just look at what did market share look like in the first three years vs. the middle three years vs. the last three years,” Snowden said. “It’s gonna shift around, it’s not done. I think this notion that the market share that’s established is sort of permanent here in the US, to me, that’s crazy talk.

“I’m not saying that it’s going to be wildly different than it is today but it’s going to ebb and flow, it’s going to move around, it’s going be fluid. And what we announced this morning, or last night and this morning, is something new and different to think about that probably wasn’t in consideration for anybody a day ago. It’s gonna have an impact on what that overall market share looks like and we think we’re going to be a major player.”

How many customers did Penn get from Barstool?

One of the figures Snowden shared that stood out the most was that Barstool Sportsbook added only 1.5 million customers to Penn’s digital database in three years of operation.

That is a far cry from the 66 million “Stoolies” that Penn said it would be tapping into directly when the partnership was first announced in January 2020.

Of those 66 million Stoolies, 62% said they bet on sports. Nearly half, 44%, said they gambled weekly with 41% of those gamblers averaging more than $51 a bet.

$300 million in marketing to back ESPN Bet

Penn plans to spend around $150 million on marketing outside of ESPN to help push the product. That is in addition to the $150 million annual guaranteed spend to ESPN in the deal.

About two-thirds of that budget is new money compared to what was planned to market Barstool Sportsbook this year, Snowden said.

Customer acquisition costs of $200 to $300 are “pretty healthy” levels, Snowden said. Penn will continue to invest at attractive levels, he added.

With essentially hitting the reset button on its sports betting business, Penn is pushing out profitability expectations to 2025.

ESPN plan to play into customer acquisition

How and when Penn gets access to ESPN’s database of customers will be up to ESPN.

“I would just say that, again, ESPN’s been working on this for some time behind the scenes and they have a robust plan, it’s comprehensive, it’s exciting,” Snowden said.

According to the investor presentation, ESPN has more than 25 million ESPN+ subscribers and 11 million unique fantasy sports accounts. The brand had 370 million social media followers and 100 million monthly digital unique visitors for 2022.

Any ESPN Bet customer data is ultimately owned by Penn as a company must be fully regulated to keep that information, Snowden added.

Did Portnoy keep Penn out of NY?

Snowden changed his tune significantly on getting access to New York from when he called the state a “margin killer” shortly before licenses were announced and Penn missed out on a license.

“Look, I think, and Dave covered some of this in his emergency press conference, I think going in with ESPN Bet sets you up to get access pretty much anywhere. Now some states, there’s limits of licenses and things of that nature, but I think where there’s a will there’s a way and there’s creative ways to get into some of the states that we’re not currently in.

“That’s something that’s a high priority for both us and ESPN and we’ll continue to make that a high priority. … We’ve talked before about New York. No one loves the tax rate in New York but there could be opportunities in the short term or medium term to get access to New York creatively and those are things that we’re working on behind the scenes.”

Snowden appears to be talking about Portnoy admitting Penn missed out on licenses because of him:

I think both [Penn and Barstool] were like ‘We’re going to take this thing to the moon,’ and we underestimated just how tough it is for myself and Barstool to operate in a regulated world. … We got denied licenses because of me, you name it. So the regulated industry probably not the best place for Barstool Sports and the type of content we make.

– Portnoy’s emergency press conference via twitter