By Disney-owned ESPN has recently made a significant move into the sports betting industry, which has benefited both Penn Entertainment and Dave Portnoy from Barstool Sports. This development has had a negative impact on various other gambling companies’ stocks, but these stocks might still present an opportunity for investment.
Late on Tuesday, Penn Entertainment (PENN) announced its acquisition of media, marketing, and brand rights to ESPN. This deal, estimated at $2 billion, involves ESPN, which is majority-owned by Disney (DIS). Disney is set to report its earnings the following day. As part of this transaction, Penn Entertainment has also obtained exclusive rights to the ESPN Bet trademark for an initial period of 10 years.
Through this move, ESPN’s entry into the rapidly growing sports betting market grants Penn Entertainment, a casino operator, access to one of the leading names in American sports media. In exchange for $1.5 billion in cash and stock warrants worth $500 million, Penn Entertainment gains the ability to promote across various ESPN platforms and collaborate with talented individuals.
As a result of this groundbreaking deal, Penn’s shares surged by almost 13% during premarket trading on Wednesday. However, Penn Entertainment is not the only one reaping the rewards. Concurrently with this transaction, Penn Entertainment sold Barstool Sports back to its founder, Dave Portnoy, which seems to have been a highly favorable arrangement. In light of this development, Barstool Sportsbook will now be rebranded as ESPN Bet.
Earlier in February, Penn Entertainment completed its acquisition of the remaining 64% stake in Barstool that it did not already own. The deal valued Portnoy’s digital media company at approximately $600 million. Penn Entertainment agreed to sell Barstool back to Portnoy in exchange for specific non-compete and other restrictive agreements. Additionally, Penn Entertainment will receive 50% of the gross proceeds from any future sale or monetization event involving Barstool.
In a video shared on X, the popular social media platform formerly known as Twitter, Portnoy expressed his determination never to sell Barstool again. He emphasized that this is the first time in over a decade that he has full control over the group he founded back in 2003.
An Unforeseen Windfall: Barstool’s Return to Penn
In a surprising turn of events, it appears that Dave Portnoy, the founder of Barstool Sports, has managed to reclaim his company from Penn for a fraction of what he originally sold it for. While the exact details of this deal remain unclear, it is clear that Portnoy will walk away with a significant windfall. It’s worth noting that Portnoy still holds a substantial amount of Penn stock, as per the original agreements made during Barstool’s sale.
However, the news hasn’t been so favorable for other players in the gambling industry who will now have to contend with the new Penn-ESPN behemoth. Many of these companies have seen their stocks take a hit in Wednesday’s trading session.
For instance, shares in Flutter suffered a 3% drop in London. Despite this setback, Flutter recently announced strong first-half profits and celebrated a significant milestone with Fan Duel turning a profit. Meanwhile, DraftKings saw a hefty 5.2% decline in premarket trading, and MGM Resorts International experienced a modest 1.1% retreat.
Nonetheless, this presents a potential opportunity for investors who see this downturn as a chance to get involved in the space.
Analysts surveyed by FactSet overwhelming favor Flutter, with a majority of them giving it Buy ratings. The average price target for Flutter implies a promising upside of 23% from its current levels. MGM finds itself in a similar position, with 71% of analysts recommending a Buy rating and an average target price suggesting gains of 25%.
The outlook for DraftKings is more subdued, although it still maintains mostly Buy ratings. However, target prices suggest slightly less impressive upside, at under 10%. Nevertheless, even some skeptics are revising their stance on DraftKings in light of recent weakness.
“We have decided to upgrade our rating from Underweight to Neutral due to this price weakness,” wrote Joseph Greff and his team of analysts at J.P. Morgan in a recent note, referring to the stock’s decline following the Penn-ESPN deal. While they acknowledge the potential for market share shifts and disruption in the near term, they believe larger operators will weather the storm.
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