ESPN Deal Credit Positive for Penn Entertainment, Says Moody’s

Posted on: August 14, 2023, 06:30h. 

Last updated on: August 14, 2023, 01:12h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Last week, Penn Entertainment (NASDAQ: PENN) announced it will pay $1.5 billion over 10 years to use ESPN’s “ESPN Bet” brand on its online and retail sportsbooks. That’s while granting rights to the unit of Walt Disney (NYSE: DIS) to acquire a significant amount of its equity. Moody’s Investors Service views the move as credit positive for the regional casino operator.

Penn ESPN
A slide from a Penn Entertainment investor presentation. Moody’s says the casino operator’s credit outlook could benefit from a deal with ESPN. (Image: Penn Entertainment)

The ratings agency acknowledges that Penn could face significant customer acquisition and marketing costs in the fourth quarter and into next year to kickstart ESPN Bet. But it added the alliance with ESPN could pay long-term dividends for the gaming company.

We expect a ramp-up period, which will also call for incremental spend for marketing, promotions and customer acquisition purposes,” noted Moody’s. “As a result, we expect PENN’s leverage to increase to 5.0x from 4.7x (company calculated net leverage). Those costs should come down over time as ESPN Bet matures, establishes, and gains market share. PENN believes its interactive segment has longer-term adjusted annual EBITDA potential of $500 million to $1 billion, depending on North American market share in online sports betting and iCasino.”

The credit grader has a rating of “B1,” putting it well into junk territory, and a “stable” outlook on Penn’s corporate debt. As of June 30, the Ameristar operator had $1.27 billion in cash and cash equivalents and debt of $2.68 billion.

Ins and Outs of Penn/ESPN Deal

Reportedly, Penn wasn’t ESPN’s first choice for the marketing pact, nor its second. That’s one reason sell-side analysts are divided on the agreement.

Another reason is that the casino operator shed Barstool Sports for a mere $1, reselling it to founder David Portnoy. That happened just months after putting the finishing touches on the acquisition that valued the media property at $550 million. Some analysts believe Barstool could be worth as much as $600 million, and while Penn has rights to 50% of the economics should Portnoy sell the company again, the look of not wringing any shareholder benefit out of the transaction is poor.

Portnoy claims he has no plans to sell Barstool again, indicating there are no near-term avenues through which Penn could benefit from its agreement with the media company. Additionally, Penn could give up a significant amount of its equity to ESPN.

“PENN will also grant ESPN about $500 million in warrants to purchase 31.8 million PENN common shares that will vest over 10 years,” added Moody’s. “ESPN could receive bonus warrants upon ESPN Bet meeting certain US online sports betting market share performance thresholds. ESPN will have the option to designate one nonvoting board observer, or after three years designate a board member subject to gaming regulatory approval and a minimum ownership threshold.”

Disney sold its interest in Penn rival DraftKings (NASDAQ: DKNG) for $90 million, a move that could be tied to the agreement with Penn.

Penn Needs to Spend to Leverage ESPN Brand

While the ESPN brand is one of the most recognizable in the sports world, Penn still faces costs to adequately leverage that name.

To date, Penn’s been a bit player in terms of US sports wagering market share, though it hasn’t spent on marketing on par with competitors such as BetMGM, DraftKings, and FanDuel.