Bet On It: Penn hitches wagon to ESPN for betting pact, drops Barstool

Welcome to the latest edition of “Bet On It,” where The Fly looks at news and activity in the sports betting and iGaming space.

SECTOR NEWS: Wynn Resorts (WYNN) announced its decision to close its online sports betting and iGaming platform, WynnBET, in certain jurisdictions. Working with its regulators and patrons, the company will seek to cease operations in Arizona, Colorado, Indiana, Louisiana, New Jersey, Tennessee, Virginia, and West Virginia as soon as possible. Operations in Nevada and Massachusetts will continue unaffected and operations in New York and Michigan remain under review. “In light of the continued requirement for outsized marketing spend through user acquisition and promotions in online sports betting, we believe there are higher and better uses of capital deployment for Wynn Resorts shareholders. While we believe in the long-term prospects of iGaming, the dearth of iGaming legislation and the presence of numerous other investment opportunities available to us around the globe have led us to the decision to curtail our capital investment in WynnBET to focus primarily on those states where we maintain a physical presence,” said Julie Cameron-Doe, CFO of Wynn Resorts.

In a regulatory filing, MGM Resorts (MGM) COO Corey Ian Sanders disclosed the sale of 25,000 common shares of the company on August 7 at a price of $45.212 per share.

BetMGM and Revolutionary Racing Kentucky announced a new market access agreement allowing BetMGM to bring its online and retail sports betting platform to Kentucky once legalized sports betting launches. The companies also will open a retail BetMGM Sportsbook at Sandy’s Racing & Gaming. BetMGM will offer online sports betting capabilities as soon as Kentucky’s regulated market commences and pending licensure and regulatory approval. Additionally, plans are underway to open a 5,200 square-foot retail BetMGM Sportsbook this fall with RRKY at Sandy’s Racing & Gaming, a $75M gaming and entertainment facility in Ashland. Construction of Kentucky’s first quarter horse racetrack and equestrian center will follow on 182 acres adjacent to Sandy’s, with the first races launching in 2025.

DROPPING THE STOOL, PICKING UP THE WORLDWIDE LEADER: On Tuesday, Penn Entertainment (PENN) announced that it has entered into a transformative, exclusive U.S. online sports betting agreement with ESPN, Inc. (DIS) and ESPN Enterprises. The transaction includes: Exclusive Right to the #1 U.S. Sports Brand: PENN has secured the exclusive right to the ESPN Bet trademark for OSB in the U.S. for an initial 10-year term which may be extended for an additional 10 years upon mutual agreement. Launch of ESPN Bet: The online Barstool Sportsbook will be rebranded ESPN Bet in the Fall of 2023; theScore Bet will continue to operate in Canada. Deep Integration: ESPN Bet, operated by PENN Interactive, will benefit from exclusive promotional services across ESPN platforms including programming, content, and access to ESPN talent. ESPN Becomes a Highly Aligned, Long-Term Strategic Partner: Agreement enables efficient customer acquisition and retention spend across premier sports content. Mutually beneficial relationship through ongoing collaboration and warrants. PENN has agreed to make $1.5 billion in cash payments to ESPN paid over the initial ten-year term and grant ESPN approximately $5001 million of warrants to purchase approximately 31.8 million PENN common shares that will vest ratably over 10 years, in exchange for media, marketing services, brand and other rights provided by ESPN. Upon ESPN Bet meeting certain U.S. OSB market share performance thresholds, ESPN could receive bonus warrants to purchase up to an additional approximately 6.4 million PENN common shares. ESPN will have the option, at its discretion, to designate one non-voting Board observer or, upon completion of year 3 of the agreement, designate a Board member subject to satisfying gaming regulatory approval(s) and a minimum ownership threshold. Significant Value Creation Potential: Provides an estimated $500 million to $1.0 billion+ of annual long-term Adjusted EBITDA potential in our Interactive segment. Rebranded iCasino Product: Powered by our new promotional engine, our new app will include a separate Hollywood-branded iCasino product in those states where permitted. PENN Divests Barstool Sports to Founder David Portnoy: PENN sold 100% of the Barstool Sports, Inc. (“Barstool”) common stock to David Portnoy in exchange for certain non-compete and other restrictive covenants. PENN also has the right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool

Following the deal with ESPN, Craig-Hallum downgraded Penn to Hold from Buy with a price target of $30, down from $56. The process to unwind the company’s relationship with Barstool “has us perplexed,” said the firm in a note partially titled “When You Are Losing The Game, Sometimes You Need A Hail Mary.” Given the strong fundamentals of Barstool Sports and a fair value evaluation of $660M as of February, “it is hard to defend this sale process as maximizing the asset’s value for shareholders,” the firm told investors. Meanwhile, though the firm sees “significant potential upside with ESPN Bet,” it also notes that media partnerships in sports betting besides SkyBet in the U.K. “haven’t worked to date,” citing Penn/Barstool, FoxBet, MaximBet, Bally and Sinclair RSNs, Sports Illustrated and 888, and Pointsbet and NBC “to name a few.” Given the risks, the firm thinks it is prudent to move to the sidelines “with a cautious but positive bias” and take a “show me” approach, the analyst told investors. Jefferies noted that the deal gives Penn the potential to reposition its U.S. OSB business to gain share over time. However, issues remain as to the magnitude of share given the later entry, as well as the competitiveness of product advancement, said the firm, who adds that “it is fair to focus on the cost of entry thus far for PENN, given the investment and returns thus far.” The firm also noted that Penn concurrently sold Barstool back to founder Dave Portnoy.

Earlier today, in a regulatory filing, Penn Entertainment filed a prospectus supplement that forms a part of the Registration Statement on Form S-3ASR via which the selling shareholder, David Portnoy, may offer and resell up to 1,254,800 shares of the company’s common stock. The filing indicates that Portnoy beneficially owned 1,481,600 shares of the common stock prior to this offering. Earlier this week, Penn sold Barstool Sports back to founder Dave Portnoy in exchange for certain non-compete and other restrictive covenants. Dave Portnoy, the founder of Barstool Sports and an Penn Entertainment shareholder, tweeted: “I ain’t selling $penn at this price that’s for sure. I think people are overreacting. I said it’s a win win and I believe that. People panicking in the streets and reacting to fake news. I think it’s on sale now. I’m not a financial advisor and I’m not part of $penn”

As for what is in store for the future of ESPN Bet, the new operator has its eyes on a market where Barstool Sportsbook was denied a license, New York. “No one loves the tax rate in New York. But there could be opportunities in the short-term, medium-term to gain access to New York creatively, and those are the things we’re working on behind the scenes,” Penn Entertainment CEO Jay Snowden said during a Wednesday earnings call.

EARNINGS RECAP: A number of companies in the space, reported second quarter earnings this week. Gan Limited (GAN) came in ahead of last years Q2 report in terms of EPS, noting a loss per share of 42c. However, the company did fall short of last years revenue figure. “Our second quarter saw solid execution and progression of our business plan. We continued to see strength in international markets for B2C, expanded our roll-out of GAN Sports, and made significant progress on the new GameSTACK 2.0 version of our technology platform. With GAN Sports now live in nine U.S. states and the encouraging momentum we are seeing in our international markets, we would expect our top-line performance to improve over the coming quarters and into 2024. As an update on our strategic initiatives, we have received indications of interest from prospective bidders interested in acquiring all or part of our business. A special committee of our Board of Directors, comprised of non-executive directors, is evaluating those alternatives. The indications of interest are non-binding; no definitive agreements for a strategic transaction have been reached at this time. There is no assurance that a transaction will take place, and no timetable for completion of any transaction.”

Additionally, Wynn Resorts beat analyst expectations in its Q2 report. “Our second quarter results reflect continued strength in North America and Macau,” said Craig Billings, CEO of Wynn Resorts, Limited. “In the U.S., Wynn Las Vegas and Encore Boston Harbor continue to perform well, generating a new second quarter record for Adjusted Property EBITDAR at our combined North American properties. In Macau, the post-COVID recovery accelerated during the quarter, with particular strength in our mass gaming, luxury retail and hotel businesses. On the development front, we were excited to begin construction on Wynn Al Marjan Island, which we believe will be a ‘must see’ tourism destination in the UAE.” Stifel raised the firm’s price target on Wynn Resorts to $150 from $137 and reiterated a Buy rating on the shares. The firm has “once again” moved its estimates materially higher based on the strength coming out of Macau, said the analyst, who continues to believe “Macau-centric stocks are well positioned right now” and thinks pent-up demand in China should be sustainable for “at least another year.”

Penn also found itself partially beating EPS expectations but matching analyst consensus for revenue.. Its report came the morning after the ESPN deal. Snowden, said: “The Company experienced stable property level performance this quarter with each month showing sequential improvement. Additionally, we are excited to have successfully re-launched our sportsbook app, which features major product improvements that significantly upgrade the user experience, including streamlined navigation, faster load times, expanded wagering markets, enhanced promotions and deeper media integrations. The migration reflects a significant achievement for our Company that was completed seamlessly and with minimal disruption to our customers. Our state-of-the-art technology platform continues to drive strong results for theScore Bet in Ontario. Additionally, as we announced yesterday, in connection with our agreement with ESPN, our online Barstool Sportsbook will be rebranded ESPN Bet in Fall 2023. The powerful combination of our operational expertise, improved product, unparalleled market access and industry leading PENN PlayTM database with the #1 sports brands in both the U.S. and Canada with ESPN and theScore, will create a best-in-class user experience and allow us to significantly expand our digital footprint and more efficiently grow our customer database.”

Sportradar (SRAD) reported a beat in the second quarter as well. The company higghlighted that it expects full-year revenue to be EUR 902M-EUR 920M and adjusted EBITDA to be EUR 157.M-EUR 167.M, representing 25% to 33% growth versus last year. Deutsche Bank raised the firm’s price target on Sportradar to $14 from $13 and maintained a Buy rating on the shares post the Q2 report.

Genius Sports (GENI) noted that the company’s year-to-date group adjusted EBITDA more than quadrupled year-on-year to $24M in Q2. “We enter the second half of 2023 having reached a significant inflection point in our business,” said Mark Locke, Genius Sports Co-Founder and CEO. “Following the financial outperformance in the first half of the year and the recently renewed partnerships with FDC and the NFL, we have validated our core strategy, differentiated our technology stack, and proven our sustainable business model. The ongoing success through the second quarter perfectly demonstrates our balanced approach in delivering near-term results, while accelerating Genius towards our long-term growth and profit targets.” B. Riley raised the firm’s price target on Genius Sports to $10 from $9 and held a Buy rating on the shares following the Q2 beat. Genius remains one of the best ways to play visible online gaming growth, the firm wrote.

ADDITIONAL ANALYST COMMENTARY: Deutsche Bank views Penn Entertainment’s strategic alliance with ESPN as a net positive for Penn, saying it was clear the Barstool brand didn’t have the customer acquisition network it advertised and the company now has a new potential growth while essentially eliminating the risks associated with Barstool. The firm also sees the news as positive for Caesars (CZR) and DraftKings (DKNG), as it “relinquishes both from their committed spend with ESPN over the coming years.” While it hasn’t necessarily been widely publicized, Caesars’ and DraftKings’ respective ESPN partnerships were “absolute anchors,” with the customer acquisition spend, through the ESPN channel, likely the most expensive channel on a per customer acquired basis, Deutsche contends. The firm thinks the breakup is likely immaterial to both companies’ net revenue, and tangibly favorable for adjusted EBITDA.

Truist also downgraded Penn Entertainment to Hold from Buy with a price target of $30, down from $33. The analyst downgraded the shares following a rally as the firm believes the market will take time to digest the new deal with ESPN. Penn’s upside from ESPN Bet could be material, though there are “sizable execution risks that may not resolve soon,” the form told investors. In addition, the firm advises waiting before adding to positions.

Truist upgraded DraftKings to Buy from Hold with a price target of $44, up from $31. The analyst cited the company’s inflection to profitability in Q2 as the management navigated around numerous early threats, and the path to “significant and sustainable” profitability has become clearer, the firm noted. DraftKings may be the “best top-line story in gaming today”, even though the sector has been constrained by macro concerns, the firm concluded.

Canaccord lowered the firm’s price target on Penn Entertainment to $38 from $44 and kept a Buy rating on the shares. The firm said they reported mixed Q2 results that were largely overshadowed by the company’s announcement of a transformative deal that will have it serve as the exclusive, long-term online sports betting partner of ESPN. PENN will pay $150M annually over the 10-year agreement for the right to license the ESPN brand for OSB, along with marketing & promotional services, content integrations, and access to ESPN talent, and PENN plans to complement this with substantial additional investments to support its goal of becoming one of the top three operators in the North American market.

Jefferies analyst James Wheatcroft raised the firm’s price target on Flutter Entertainment (PDYPY) to 19,500 GBp from 18,000 GBp and backed a Buy rating on the shares. The firm’s FY23, FY24 and FY25 group EBITDA estimates have been raised 1%, 2% and 11%, respectively, as U.S. EBITDA estimates were increased by 7%, 17% and 44% for those years given new state opening losses and Flutter’s “helpful new” U.S. modelling template, the analyst told investors in a post-earnings note. On the other hand, JPMorgan raised the firm’s price target on Flutter Entertainment to 17,100 GBp from 16,800 GBp and keeps a Neutral rating on the shares.

Morgan Stanley raised the firm’s price target on DraftKings to $35 from $32 and reaffirmed an Overweight rating on the shares. The firm is raising its FY23 and FY24 revenue estimates by 8% and 1%, respectively, while narrowing its FY23 EBITDAR loss by about 90% to reflect DraftKings’ Q2 beat, flowing through the operating structure to future windows with higher hold.

PUBLICLY TRADED COMPANIES IN THE SPACE INCLUDE: Accel Entertainment (ACEL), Bally’s (BALY), Boyd Gaming (BYD), Caesars (CZR), Churchill Downs (CHDN), DraftKings (DKNG), Flutter Entertainment (PDYPY), Gambling.com (GAMB), Gan Limited (GAN), Genius Sports (GENI), Las Vegas Sands (LVS), MGM Resorts (MGM), Penn Entertainment (PENN), Rush Street Interactive (RSI), Super Group (SGHC) and Wynn Resorts (WYNN).