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A Perfect Marriage

Why the Penn/ESPN sports-betting partnership is different than any other combination of an operator and a media company

A Perfect Marriage

To say that online gaming is changing is an understatement.

Just as this column is being written, for example, Wynn Resorts dropped a bombshell: It is ending WynnBET in jurisdictions where it doesn’t have a physical presence.

The announcement came just two days after Penn Entertainment dropped its own bombshell in the opposite direction: PENN is entering a partnership with ESPN to create ESPN Bet.

The announcements come in an environment where market share leaders FanDuel and DraftKings consolidate their positions and as operators from Caesars to Rush Street dramatically reduce costs to become EBITDA-positive. Add solid performer BetMGM and ever-so-prudent Boyd Gaming, with its own unique approach, to the mix, and the frenetic world of online gaming is starting to take the shape that may dominate for some time.

Put another way, the above-mentioned companies, sans Wynn, should be the winners in North American online sports betting and iCasino.

FanDuel and DraftKings appear to have achieved unassailable market share positions from which to transition toward profitability. Caesars has spent its money to establish itself and develop its own technology and likewise is ready for profitability, relying, in large part, on the strength of its industry-leading database of well over 60 million customers.

Wynn is facing the reality that what it does best is provide live, touch-and-feel resort experiences and is best off focusing there. MGM, like Caesars, has established itself and can capitalize on its big brick-and-mortar player database, though the company also is more active digitally, such as its ownership of pure online operator LeoVegas.

As a 5 percent owner of FanDuel, Boyd is riding the online sports betting train driven by 95 percent owner Flutter Entertainment while carving out its own niche in iCasino with wholly owned Stardust Online Casino.

Which brings us to Penn Entertainment. When PENN announced its ESPN deal, the stock shot up, then plunged as investors began to worry about the $300 million a year (half with ESPN and half in the first year or two outside the partnership) that will be invested to build market share, the dismal record of other ballyhooed media-operator partnerships, and question why they should believe today’s promises given similar optimism three years ago over the marriage to Barstool Sports that is now ending in amicable divorce, but divorce, nonetheless.

For such a reaction, we can only say, “Thank You, Bears,” as we used the selloff to buy shares in PENN for what we think will be a big success.

The investor history regarding PENN’s online venture has been manic followed by depressive. Investors ran up the stock from the teens in 2020 to over $115 a share a year later in sports betting exuberance.

Eventually, reality set in for sports betting stocks. In PENN’s case, its stock fell into the $20s, which is about where it should have been based on its land-based business. In other words, many said, you could buy PENN for the potential of its digital business and get its profitable land-based business for free.

Then came the spike and plunge after the ESPN announcement.

It is easy to understand a reaction of once burned, twice shy. But there are differences between the ESPN deal and others, whether those of operators who naively thought attachment to a big media name would easily draw in profitable bettors, or PENN’s own lessons learned from its Barstool experience.

There are two differences that make comparisons to other media deals, to use PENN CEO Jay Snowden’s phrase, like comparing apples to eggplants.

The first is size and credibility. NBC Sports or Fox Sports, as examples, could reach tens of millions of potential bettors in exchange for operators spending big promotional bucks, but ESPN is in another universe. Use its 105 million digital users and 318 million social users as examples. Then, consider, when the names NBC or Fox are spoken, the word sports does not naturally follow. But ESPN is sports, through and through, to all of its hundreds of millions of viewers and users.

The second difference is commitment. ESPN isn’t just going to take ad dollars and run. It is creating a true partnership with PENN. It will have warrants and performance bonuses that could end up giving it 20 percent ownership of PENN. That is commitment to success.

Skeptics point to the dilution that such an ESPN stake would create. Snowden says it would be a nice problem to have.

Skeptics, many the same people who were giddily happy at $115 a share, even nitpick the November launch date, noting that half of the NFL season will already be over. To which, I ask, who the heck cares? PENN and ESPN are building a hopefully permanent business in which, over time, the launch month is meaningless.

Snowden says ESPN Bet should produce $500 million to well over $1 billion a year in EBITDA for PENN. You can do your own back-of-the-envelope calculations, but such a result means a stock way north of today’s price, even with any ESPN dilution.

Of course, getting there won’t happen overnight. There will be that period of marketing investment that drives the leverage ratio over five times, which will be followed by a rapid deleveraging, Snowden says.

To all of that, the skeptics say PENN is now a show-me stock. Of course, by the time success is shown, the big investor profits will have been made.

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