Penn Entertainment has secured exclusive rights to the ESPN Bet trademark through a deal with Walt Disney's ESPN, but some Wall Street analysts are expressing concerns. As part of the agreement, Penn will make $1.5 billion in cash payments to ESPN over a 10-year period.
This strategic move is expected to have a significant impact on Penn's earnings. The company projects that the ESPN Bet deal could generate between $500 million and $1 billion of annual long-term adjusted Ebitda in its interactive segment.
Previously, Penn Entertainment owned Barstool Sports, which offered online sports betting through Barstool Sportsbook. However, the company announced on Tuesday that it has sold 100% of Barstool Sports back to founder Dave Portnoy.
The ESPN Bet announcement, coupled with impressive second-quarter earnings and revenue, initially spurred a surge in Penn's stock price. On Wednesday, the shares climbed 9.1%, marking the largest one-day percentage gain since June 2022.
However, the stock experienced a downturn as Truist Securities analyst Barry Jonas downgraded Penn shares to Hold from Buy and reduced his price target from $33 to $30. According to Jonas, the market needs time to assimilate the implications of the new deal.
Jonas identifies several risks associated with this gambling tie-up. One such risk is the ability of either party to terminate the agreement after three years if specific market share thresholds are not met. Additionally, Penn will face stiff competition from established online sports-betting players like DraftKings, which recently reported a profitable quarter.
Analyst Doubts Profitability of Deal
Potential Benefits for Penn National Gaming
While some analysts have reservations, others see notable advantages for Penn National Gaming, especially as more states consider legalizing online sports betting. Susquehanna analyst Joseph Stauff believes that this deal could give PENN a unique opportunity to establish a strong presence in new states such as Texas and California. Roth MKM analyst Edward Engel also views the partnership with ESPN as a chance for Penn National Gaming to become a more influential player in the growing online sports betting and iGaming market in the United States.
In conclusion, the partnership between Penn National Gaming and ESPN has generated mixed reactions from industry analysts. While some express doubts about its profitability, others recognize the potential benefits for Penn National Gaming, particularly in states where online sports betting is gaining traction.
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