{"id":10755,"date":"2023-08-10T10:45:24","date_gmt":"2023-08-10T10:45:24","guid":{"rendered":"https:\/\/isafespend.com\/investing\/penn-wins-in-espn-betting-move-why-draftkings-stock-is-dropping\/"},"modified":"2023-08-10T10:45:25","modified_gmt":"2023-08-10T10:45:25","slug":"penn-wins-in-espn-betting-move-why-draftkings-stock-is-dropping","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=10755","title":{"rendered":"Penn Wins in ESPN Betting Move. Why DraftKings Stock Is Dropping."},"content":{"rendered":"
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ESPN\u2019s move into sports betting puts pressure on other gambling names.<\/h4>\n


\n Ethan Miller\/Getty Images
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Disney-owned ESPN is expanding into sports betting in a move that has buoyed Penn Entertainment. It has also knocked a bevy of other gambling names, including DraftKings, into the red\u2014and those stocks could be a buy.<\/p>\n

\n Penn Entertainment
\n (ticker: PENN) announced late Tuesday that it had bought media, marketing, and brand rights to ESPN\u2014majority owned by
\n Disney
\n (ticker: DIS), which reports earnings in the day ahead\u2014in a deal worth $2 billion. Penn also secured the exclusive rights to the ESPN Bet trademark for an initial 10-year term.<\/p>\n

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ESPN\u2019s move into the booming sports betting space gives casino operator Penn rights to one of the top names in U.S. sports media\u2014including promotion across its platforms and access to talent\u2014for $1.5 billion in cash and stock warrants worth $500 million.<\/p>\n

The deal has sent shares in Penn up near 14% in U.S. premarket trading on Wednesday\u2014but the company isn\u2019t the only winner in this deal. Penn has simultaneously sold Barstool Sports back to founder Dave Portnoy for what looks like a steal, as it rebrands its Barstool Sportsbook to ESPN Bet.<\/p>\n

Penn completed the purchase of the remaining 64% of Barstool it didn\u2019t already own in February in a deal that valued Portnoy\u2019s digital media company at around $600 million. Penn said it sold Barstool back to Portnoy in exchange for certain noncompete and other restrictive covenants, in addition to the rights of 50% of the gross proceeds received in any future sale or monetization event of Barstool.<\/p>\n

In a video posted on X<\/a>, the social media site formerly known as Twitter, Portnoy said he would never again sell Barstool and that this was the first time in more than a decade that he exerted full control over the group he founded in 2003. <\/p>\n

While the exact details of Penn\u2019s divestment are unclear, it immediately looks like Portnoy has secured a windfall\u2014reacquiring his company for next to nothing after already selling out for hundreds of millions of dollars. Portnoy also owns a ton of Penn stock<\/a>, per his original agreements for Barstool\u2019s sale.<\/p>\n

But the big news out of the gambling sector hasn\u2019t been so kind to other betting names that will have to compete with the Penn-ESPN behemoth, many of which have seen their stocks tumble in Wednesday trading.<\/p>\n

Shares in
\n Flutter
\n (FLTR.U.K.) dropped 3% in London, even as the company on Wednesday reported solid first-half profits and said Fan Duel, which it owns, had marked a milestone in turning a profit.
\n DraftKings
\n (DKNG) stock was down 7.4% in the Wednesday premarket, while shares in
\n MGM Resorts International
\n (MGM) retreated 0.2%.<\/p>\n

This could be a buy-the-dip moment for investors looking to get involved in the space.<\/p>\n

Flutter commands an overwhelming ratio of Buy ratings among analysts surveyed by FactSet, with an average price target on the stock implying upside of 23% from current levels. MGM is in a similar position, with 71% of analysts covering the stock rating it Buy, and an average target price implying gains of 25% from current levels.<\/p>\n

While the outlook for DraftKings is more muted\u2014it\u2019s still mostly rated at Buy, though target prices spell upside of less than 10%\u2014some bears are even changing their tune on the recent weakness.<\/p>\n

\u201cWe are using this price weakness to up our rating to Neutral from Underweight,\u201d analysts led by Joseph Greff at J.P. Morgan wrote in a Tuesday note, referencing the stock\u2019s decline on the back of the Penn-ESPN tie-up. However, they see why \u201clarger market share operators could see some share shift or feel some disruption from the current tamer promo environment and understand tonight\u2019s share price reaction,\u201d Greff added.<\/p>\n

While Penn estimated the ESPN deal would add $500 million to $1 billion or more of annual long-term earnings\u2014or adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda)\u2014Greff said that \u201cthis, to us, sounds aggressive.\u201d<\/p>\n

While both
\n Caesars Entertainment
\n (CZR) and DraftKings had paid sponsorship agreements with ESPN, J.P. Morgan doesn\u2019t think either received much in the way of incremental Ebitda, and that the deals were likely earnings drags. \u201cWe have a tough time seeing Penn benefiting (at least close to these long-term targets) when Caesars and DraftKings did not,\u201d Greff said.<\/p>\n

In fact, J.P. Morgan sees the Penn-ESPN deal as \u201ca huge positive for Caesars and DraftKings,\u201d because presumably ESPN will release both from their contracted agreements. Caesars stock gained 1.4%. It might be another reason to consider Penn\u2019s rivals on the back of these stock market moves.<\/p>\n

Write to Jack Denton at jack.denton@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n