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February 28, 2023

Selling Barstool Sports, Licensing Back Brand Could Create Greatest Value for PENN Shareholders

PENN Entertainment (NASDAQ: PENN) recently completed its previously announced acquisition of Barstool Sports, paying ~$388 million for the remaining 64% of the company.

PENN initially acquired a 36% interest in the business in February 2020.

The brick-and-mortar casino operator was able to take ownership and control of the digital sports media entity at a discount to fair market value. “They’ll have paid roughly $525 million in total consideration for an asset that most analysts seem to think is worth anywhere from $800 million to $1 billion,” Lloyd Danzig (managing partner, Sharp Alpha Advisors) said.

But Barstool Sportsbook has been unable to capture market share as PENN executives forecasted, leading some industry insiders to speculate that another change in ownership could be on the horizon.

“If a big enough gap opens up between the value of Barstool the media brand and Barstool the betting brand, PENN could find themselves in a spot where selling Barstool and licensing back the brand for betting creates the greatest value for shareholders,” Chris Grove (co-founding partner, Acies Investments) said.

“We're not there yet. But it's interesting to imagine how [CEO and president Jay] Snowden would handle a ten-figure offer for Barstool, especially if PENN feels like the brand has hit a ceiling in terms of online betting market share."  

PENN declined the opportunity to comment for our story, instead pointing us to comments made during the company's recent earnings call.

PENN leadership predicted Barstool Sportsbook would be a double-digit share player, and have a

shot at a podium position

in every state in which it operates, as recently as May ’20. Owned and operated media was supposed to be the strategy that enabled it to cut through a crowded marketplace and close the gap with companies spending far more on acquisition and retention.

That hasn’t happened.

Eilers & Krejcik Gaming reports that as of December Barstool Sportsbook had just 2.65% of the national market share over the trailing 12 months. FanDuel (42.48%), DraftKings (24.78%), BetMGM (13.24%), Caesars (8.41%) and BetRivers/SugarHouse (2.71%) all had greater slices of the pie.

It’s worth noting Barstool Sportsbook did perform better in select states, including Pennsylvania (5.6%) and Michigan (6.0%), over that same period.

PENN’s vision has failed to materialize for several reasons.

For starters, FanDuel and DraftKings have captured a greater percentage of the market than expected. Industry insiders anticipated the U.S. market leaders would split 40% to 50% of the TAM. They have been eating closer to 70%.

PENN may have also overestimated Barstool’s ability to convert fans into paid sports bettors and/or the lifetime value of a Stoolie.

The overarching approach may have been flawed from the outset too. “Media-driven betting brands do not have a compelling track record in international markets,” Grove said. "SkyBet is arguably the exception that proves the rule."

It’s fair to point out that both FanDuel and DraftKings are also pursuing media-focused strategies.

Of course, they are digital-first companies. PENN’s primary business is operating buildings filled with slot machines and card tables. 

The problem for PENN, and everyone else outside the big three right now, is that there is no clear path to a podium position. “The right default assumption at this point is that the status quo is going to persist until someone produces a compelling asymmetrical strategy for disrupting share,” Grove said. “It’s not as if everyone hasn’t been trying over the last two years. People are trying and things are going more in FanDuel and DraftKings’ direction.”

FWIW, PENN expects the Q3 migration of its proprietary tech stack to be a catalyst for market share growth. "As our product has improved [in Ontario], in particular, the advanced promotional features and bonusing features provided by our player account management system, we are seeing lower CPAs, more loyal customers and greater returns on our marketing spend and investments, something we think we can replicate in other markets here in the U.S.," Snowden said during the earnings call.

If you believe Barstool is worth upwards of a billion dollars, it should have been an easy decision for PENN to buy out the remainder of the company. But it’s not clear PENN is best served holding onto the asset long-term if it is not driving sportsbook market share.

theScore aside, the digital media brand does not naturally align with any other holdings within the casino company’s portfolio (see: 43 properties across 20 states). And assets that fall outside of a company’s core corporate structure can create tension and are often divested, particularly ones that can be flipped for a few hundred million dollars in profits.

It’s just not clear who PENN would sell Barstool to. The operator is tied to the media brand. It’s hard to imagine a competitor paying a premium for the asset knowing that association exists.

If an attractive offer doesn’t materialize, the company could continue down its current path. There’s no reason PENN needs to immediately sell Barstool. 

“Just because the audience has not been converting as richly as hoped does not mean [the business] is not accretive to the portfolio and a profitable, cash-flow generating asset they would prefer to hold onto rather than sell,” Danzig said.

PENN

achieved profitability

across its interactive segment in Q4 '22.

There are also intangible benefits to having Barstool under the umbrella including, “being relevant and having brand awareness amongst both consumers and the investment public,” Danzig added.