And DraftKings stock rises on new deal with ESPN
There was a major shakeup in the sports betting world, as Penn Entertainment (NASDAQ:PENN) parted ways with ESPN Bet and will rebrand its online sports betting platform.
Meanwhile, ESPN, owned by Disney, inked a deal with DraftKings (NASDAQ:DKNG) to make it the official sportsbook and odds provider of ESPN.
The move was initially cheered by investors as Penn stock jumped 9% at the open, but then after it released lackluster Q3 earnings, the stock took a sharp turn down. DraftKings stock rose about 4% on the news.
Penn will wind down ESPN Bet on December 1, and will relaunch its sports betting app as TheScore Bet, which is affiliated with its sports media brand, The Score. TheScore Bet app is currently available in Canada and will debut throughout the U.S. around December 1.
TheScore Bet will be available in all states were ESPN Bet was. Customers of ESPN Bet will see the app transition to TheScore Bet on or around December 1.
The move terminates early a $2 billion, 10-year agreement between Penn and ESPN that was signed in 2023. It’s a messy timeline for Penn, the resort and casino owner, in the sports betting world.
Penn got into online sports betting 2020 when it signed a deal with Barstool Sports to launch the Barstool Sportsbook. In 2023, it became the majority owner of Barstool Sports, then roughly six months later sold it back to founder Dave Portnoy for $1, realizing it was not the right fit. It immediately pivoted and signed a $2 billion, 10-year deal with ESPN for the rights to ESPN Bet in November 2023.
ESPN Bet falls flat
ESPN Bet never gained any traction in an industry dominated by DraftKings and FanDuel. It only had about 2% to 3% market share, falling below second-tier rivals BetMGM, Caesars, Bet365, and Fanatics.
Earlier this year, Penn investor and hedge fund manager HG Vora waged a proxy battle, successfully getting two of its nominees elected to the board. HG Vora cited the underperformance of the company relative to its peers and the sinking stock price.
Over the past three years, Penn stock has had an average annual return of -23% and over the past five years it has averaged a -25% annualized return. Penn stock is currently trading at around $15 per share and is down 22% year-to-date.
Back in June, HG Vora executives cited, among other factors, the “failed” online sports betting strategy and “value-destructive deal-making.” It wanted the Penn to focus on the more profitable casino and racetrack businesses.
Stock rises, then falls on disappointing Q3
In exiting ESPN Bet, Penn exercised the option to terminate the agreement in the third year if certain market share performance thresholds weren’t achieved. Penn had targeted double-digit market share for ESPN Bet, but only had about 3%, ranking seventh or eighth in the market. The $150 million annual payments to ESPN will stop in Q4.
“Although we made significant progress in improving our product offering and building a cohesive ecosystem with ESPN, we have mutually and amicably agreed to wind down our collaboration,” Penn President and CEO Jay Snowden said. “We plan to realign our digital focus on our growing iCasino business, while continuing to capitalize on our omnichannel advantage as the nation’s leading regional retail casino operator.”
The initial jolt this announcement gave Penn stock was soon overcome by a disappointing third quarter earnings report, released Thursday morning. Penn generated revenue of $1.72 billion, up 5% year-over-year, but slightly below estimates of $1.73 billion.
It also had a net loss of $865 million, or -$6.03 per share, down from a net loss of 24 cents per share a year ago. The huge net loss was due to an $825 million impairment charge related to the early termination of the ESPNBet deal.
Adjusted earnings were -22 cents per share, which was better than -25 cents per share a year ago, but worse than estimates of -5 cents per share. This led the stock price to tank, dropping it down to -3% on the day.
Penn clearly had to bite the bullet here, but it remains an uncertain play given the online sports betting transition and the consistently negative earnings.
