- ESPN Bet could be on borrowed time
- There’s a three-year out clause in contract between Penn and Disney
Penn Entertainment’s (NASDAQ: PENN) ESPN Bet division may face divestiture next year if the online sportsbook fails to gain additional traction before the conclusion of 2026.
In August 2023, the regional casino operator and Walt Disney (NYSE: DIS), the parent of ESPN, finalized a 10-year deal worth $2 billion, which included a clause allowing either party to exit after three years. Penn CEO Jay Snowden referred to that anniversary during the company’s earnings conference call for the fourth quarter last week.
"But if for whatever reason we’re not hitting the levels that we need to, then obviously as you’re approaching that third anniversary, you have a three-year clause in the contract that both sides will have to do what’s in their best interests,” said Snowden in response to a question from Deutsche Bank analyst Carlo Santarelli. “And so, that’s always out there.”
Penn's deal with ESPN led to a significant loss on its purchase of Barstool Sports, which it sold back to its founder David Portnoy for only $1. The sports broadcaster concluded partnerships with Caesars Entertainment (NASDAQ: CZR) and DraftKings (NASDAQ: DKNG) to collaborate with Penn.
ESPN Bet Aiming for ‘Podium’ Standing
When ESPN Bet was launched almost two years ago, Penn aimed for it to compete with major players DraftKings and FanDuel for a top position in the US sports betting market — a feat it could not achieve with Barstool Sportsbook.
“When we announced our partnership with ESPN in the summer of ’23, both sides of this partnership made it very clear that we expected to compete for a seat at the podium,” said Snowden on the call. “And we’re not on pace right now to do that.”
Applying the podium metaphor, the gold and silver medals shift between DraftKings and Flutter Entertainment’s (NYSE: FLUT) FanDuel, both of which hold substantial advantages over bronze medalist BetMGM. Caesars Sportsbook might vie for the third position, but DraftKings and FanDuel are significantly ahead of other competitors.
According to certain estimates, ESPN Bet possesses merely a 2.35% share of the US online sports betting market — significantly below its declared objective of 20% by 2027. While emphasizing the successful launches of Penn's updated iGaming platform in Michigan and Pennsylvania, Snowden noted that the operator has “great plans set for 2025 and 2026” for ESPN Bet.
Certain investors would be pleased to witness the demise of ESPN Bet.
The future of ESPN Bet's survival is uncertain, but there’s no question that certain Penn investors would be pleased to see the gaming company exit the online sports betting market permanently.
Hedge fund HG Vora is preparing for a proxy fight against Penn, seeking three board positions with the main focus on the operator's mistakes in sports wagering. That reflects the viewpoint of the Donerail Group, also a Penn shareholder, which expressed in a letter to Penn’s board last May that the company is not succeeding in the sports betting sector.
Certain investors and analysts claim that sports betting has negatively impacted Penn shares, causing market participants to disregard the value in the operator's primary regional casino operations. There were no comments regarding the proxy battle or the participation of activist investors during the conference call.
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