FANTINI ’ S FINANCE
A Perfect Marriage
Why the Penn / ESPN sports-betting partnership is different than any other combination of an operator and a media company
BY FRANK FANTINI
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 .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business SEPTEMBER 2023