PENN clinches $2bn exclusive sports betting deal with ESPN

PENN Entertainment and Disney-owned sports broadcast network ESPN have agreed a long-term strategic alliance which will see the launch of ESPN Bet and the closure of Barstool Sportsbook.

The deal, which will mark ESPN’s foray into the B2C online sports betting sector, sent PENN’s shares surging 23% in after-hours trading, before falling back slightly to $28.17.

Under the terms of the partnership, PENN has agreed to pay ESPN $1.5bn in cash payments over the next 10 years and will grant ESPN approximately $500m in warrants, which will be used to purchase 31.8 million common shares due for vestment over a 10-year period.

Upon ESPN Bet meeting certain US online sports betting market share performance thresholds, ESPN could receive bonus warrants to purchase up to an additional approximately 6.4 million PENN common shares.

ESPN will also hold the option to designate one non-voting board observer, or upon the completion of the third year of the deal, designate an existing board member.

In exchange, PENN will receive exclusive rights to use ESPN branding, media and marketing services and the right to use the ESPN Bet trademark for online sports betting over an initial 10-year term, with an option to extend for a further 10.

Subsequently, PENN’s Barstool Sportsbook, which operates in 16 US states, will be rebranded to ESPN Bet in the fall of 2023, with the operator confirming that theScore will continue operate in Canada.

In respect of igaming, PENN has confirmed a rebrand of its icasino to a separate Hollywood-themed brand.

The ESPN Bet will benefit from exclusive promotional services across ESPN platforms, including programming, content and access to ESPN talent.

PENN has said that the partnership could provide the interactive division with between $500m and $1bn of annual long-term adjusted EBITDA.

PENN recently completed the full migration of Barstool Sportsbook & Casino to its in-house proprietary tech stack after severing ties with Kambi.

In February, Penn paid $388m to acquire the final 64% of Barstool Sports, giving the business an implied valuation of $606m. Altogether, Penn has shelled out $551m purchasing the media business.

Penn has sold 100% of the common stock in Barstool Sports back to founder Dave Portnoy “in exchange for certain non-compete and other restrictive covenants”, which would suggest he cannot launch a sports betting operation.

The operator has also confirmed the right to receive 50% of the gross proceeds received by Portnoy in any subsequent sale or other monetisation event of Barstool as part of these divestiture agreements.

In a post on X, formerly known as Twitter, Portnoy said the team had “underestimated just how tough it would be for myself and Barstool to operate in a regulated world”.

Emergency Press Conference – I Bought Back Barstool Sports pic.twitter.com/dmUk0eNowx

— Dave Portnoy (@stoolpresidente) August 8, 2023

ESPN currently has 105 million monthly unique digital site visitors, coupled with an audience of more than 370 million across the broadcaster’s social media platforms. ESPN’s streaming service, ESPN+ has an audience base of more than 25 million subscribers.

PENN Entertainment CEO and president Jay Snowden branded the deal a “transformative, major milestone” in its drive to pivoting from a pure gaming operator to an entertainment business.

“PENN’s ability to leverage the leading sports media brands in both the US and Canada with ESPN and theScore, combined with our newly launched sports betting app, will allow us to significantly expand our digital footprint and catapult ESPN Bet into a strong podium position in this space,” he explained.

“ESPN Bet will be deeply integrated with ESPN’s broad editorial, content, digital and linear product and sports programming ecosystem.

“We believe we can achieve substantial adjusted EBITDA in our interactive segment over the coming years – and this will translate to very strong free cash flow generation for the company and value creation for our shareholders,” Snowden remarked.

ESPN had previously been linked with a potential sportsbook launch on a standalone basis earlier this year following long-standing interest in exploring the vertical by parent company the Walt Disney Group, however those discussions ultimately morphed into a licensing deal.

Shedding light on the process, ESPN chairman Jimmy Pitaro acclaimed the PENN Entertainment team.

“After meeting with Jay and the PENN team, it was clear that they were the right long-term strategic partner to build ESPN Bet into a leading US sports betting platform,” Pitaro said.

“We are confident that the combination of our unparalleled audience along with PENN’s operational expertise and state-of-the-art technology provides us with a tremendous opportunity to serve the ever-growing number of consumers interested in betting,” he added.

Discussing the decision to cut ties with Barstool, Jay Snowden said: “Barstool has been a great partner and we are thankful to Dave Portnoy, Erika Ayers, Dan Katz and their team for helping to rapidly scale our digital footprint across 16 jurisdictions in the US and introducing their audience to our retail and digital products.

“The divestiture allows Barstool to return to its roots of providing unique and authentic content to its loyal audience without the restrictions associated with a publicly traded, licensed gaming company,” he added.

Such is the potential impact of this deal on the US sports betting landscape, DraftKings stock fell 9% in after-hours trading on the back of the news.

Picture credit: ESPN Press Room