Penn Entertainment stock jumped nearly 20% Friday after an investor letter took aim at CEO Jay Snowden and the company’s online sports betting spend.
Donerail Group managing partner Will Wyatt addressed chairman David Handler and the board in a public letter Friday morning.
“We believe that the significant criticism from the investment community regarding PENN’s recent capital allocation is understandable, however,” Wyatt said. “After four years of effort, attention, and billions of dollars of shareholder capital invested, the company has been unable to disintermediate the online sports betting landscape, as it had forecast.”
PENN traded nearly four times more than its average daily volume on Friday as it closed at $17.50. The stock gave back some of that growth by Monday as the stock dropped 1% to $17.33.
Penn ripped for billions spent on interactive
Wyatt outlined its investments in online gaming with a review that “demonstrates the failure of this strategic initiative,” he said.
The Barstool Sports acquisition, for example, was “fundamentally flawed,” Wyatt said. It started with a $163 million in investment to buy 36% of Barstool just weeks after Snowden took over.
“At just 12 months in, it was clear that the bet would not pay off as digital gains were weaker than management had initially forecast, and integration efforts were lackluster,” he continued. “Yet, in early 2023, PENN paid an additional $388 million to purchase the balance of the Barstool shares it did not own, taking full control.”
Penn, of course, sold Barstool back to founder Dave Portnoy for $1 when it announced the ESPN Bet deal in August. The divestment cost nearly $1 billion in non-cash losses.
theScore purchase highlighted how ‘investment thesis changed’
Wyatt next detailed the $2.1 billion spent on theScore in 2021, which the company said was done to gain Penn’s interactive technology. But Wyatt questioned whether it was necessary at all.
“Had a digitally native and more experienced leadership been at the helm, shareholders have to wonder if this could have been done in a more cost-effective manner from the onset,” Wyatt said.
He also noted that the integration of theScore failed, which did not lead to the $200 million or more in incremental adjusted EBITDA promised.
ESPN Bet losses already outsized
Wyatt ended the review with notes on ESPN Bet, which led to an adjusted EBITDA loss of more than $300 million in the fourth quarter of 2023 alone. Penn has since revised its loss guidance lower multiple times.
“What may be additionally troubling for shareholders is that the operating losses that are growing meaningfully – and have become a central part of the PENN equity narrative – sit within an interactive business that currently has no operating leadership,” Wyatt said. “What gives this Board any confidence in PENN’s future under this strategy?”
Penn hired Aaron LaBerge, the former chief technology officer at Walt Disney Company, to oversee its interactive division effective July 1. He replaces Benjie Levy, who joined as part of theScore acquisition,.
Penn stock down with Snowden at helm
The letter included a table titled “Total Shareholder Return Analysis” that focused on the growth of Penn, its casino peers and the S&P 400.
The numbers emphasize Donerail’s frustrations: while Penn’s casino peers (85.6%) and the S&P (74.3%) are up over the last five years, Penn is down 25.9%.
The numbers are worse when broken down over the time periods that Snowden was COO vs. as CEO. The stock grew 9% while he was COO but sank 42.8% after he took over as CEO in January 2020.
Snowden compensation justified?
Snowden was paid $99.3 million in total compensation between 2020 and 2023. The board compensates Snowden based on pay packages that exist in a peer group determined by Penn.
But those companies, which include video game producer Electronic Arts, TV streaming platform Roku and radio platform Sirius XM, have an average market cap value of $13.5 billion. Penn’s sits at $2.2 billion.
“We question why the Company’s comp set was not adjusted to include smaller companies as PENN’s market capitalization has shrunk over time, a best practice that many boards are mindful each year to do,” Wyatt said.
Chairman buys before Penn stock bump
Handler bought 40,000 shares at an average of $14.94 each on Thursday and now owns 283,450.
Earlier this month, Handler bought 20,000 shares directly and another 20,000 indirectly through a foundation.
