Shares of Penn Entertainment (NASDAQ:PENN) soared over 20% during extended trading hours yesterday after the company inked a $2 billion deal with Disney’s (NYSE:DIS) ESPN. The two companies are jointly launching a sports betting business, operating under the brand name ESPN Bet. This initiative will initially operate in the 16 states where Penn currently conducts its business operations.
Per the terms of the deal, Penn will pay $1.5 billion in cash and grant another $500 million in warrants to ESPN over a ten-year period. The deal is subject to extension for another ten years upon mutual consent.
Here’s How This Deal is Beneficial for Penn
Penn is an American casino company and operator of integrated entertainment, sports content, and casino gaming. Under the deal, Penn will operate the ESPN Bet business and use the ESPN brand name for marketing and promotions, while also using some of ESPN’s talent for branding. On the other hand, Penn will sell Barstool Sports back to its owner, Dave Portnoy.
Penn bought a minority stake in Barstool in 2020 and took full ownership earlier this year. However, with the Barstool Sportsbook brand, Penn has been unable to compete efficiently in the sports betting world with the likes of DraftKings (NASDAQ:DKNG) and FanDuel. Penn hopes to win a major share of the sports betting arena with the ESPN Bet tie-up, knowing that ESPN is already a popularly loved sports channel with a massive fanbase.
Exploring the Benefits Disney Receives from This Deal
The Walt Disney Co. has long wanted to enter the lucrative sports gambling space. ESPN Chairman Jimmy Pitaro emphasized that the company’s central objective remains catering to sports enthusiasts and said, “Our primary focus is always to serve sports fans, and we know they want both betting content and the ability to place bets with less friction from within our products.”
Penn Entertainment has all the necessary elements to run a successful sportsbook across North America. Penn seems to be an apt partner for Disney’s foray into gambling, as it has the operational experience, extensive market access, and proprietary technology platform to run the business competitively.
The deal also comes at a time when Disney CEO Bob Iger has been mulling over strategically selling a minority stake in ESPN. The deal will bring in much-needed cash for the ESPN business, which has been suffering from a loss of TV subscribers. Disney is set to report its Q2FY23 results on August 9, after the bell. A number of known headwinds are expected to hinder the company’s performance.
Is PENN Stock a Buy or a Sell?
Yesterday, Craig-Hallum analyst Ryan Sigdahl reiterated a Buy rating on PENN stock. Penn is slated to release its Q2FY23 results on August 9, before the market opens. Wall Street expects Penn to post diluted earnings of $0.42 per share on revenues of $1.66 billion.
Ahead of the Q2 print, analysts remain cautiously optimistic about PENN stock. On TipRanks, Penn has a Moderate Buy consensus rating based on four Buys and two Hold ratings. The average Penn Entertainment price target of $32.60 implies 31.2% upside potential from current levels. Meanwhile, PENN stock has lost 15.1% so far this year.
