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Combining Mickey Mouse with Sin City may sound like an odd concept for a film, but it’s actually happening. Disney, a family-friendly company, is partnering with Penn Entertainment to venture into the world of sports betting. This move comes after Penn Entertainment ended its partnership with the Barstool Sports media group to join forces with Disney’s ESPN.
Disney has had concerns about tarnishing its wholesome brand with the association of gambling. This is understandable, given the potential negative consequences of gambling addiction, as seen in the UK. However, the allure of new revenue streams has prompted Disney CEO Bob Iger to reconsider. Disney’s stock has experienced a significant decline since reaching its peak in 2021. The company’s streaming expenses have skyrocketed, while its traditional broadcast and pay-TV networks struggle in the era of cord-cutting.
Penn Entertainment’s stock price has followed a similar trajectory, reaching a high of $130 in 2021 after partnering with Barstool. However, its shares have since fallen back to pre-pandemic levels in the low $20s. One of the contributing factors is the controversial founder of Barstool, Dave Portnoy, who has been perceived as promoting irresponsible gambling.
The partnership between Disney and Penn is expected to be a game-changer. In exchange for allowing Penn’s wagering app within ESPN content, Penn will pay Disney $1.5 billion over the next ten years. Additionally, Disney will receive warrants on Penn shares. If the new “ESPN Bet” meets certain market share targets, Disney will receive a fifth of Penn’s stock.
Following the announcement, Penn’s shares rallied by over a third in after-market trading, bringing the company’s market capitalization to $4 billion. Taking into account its debt and lease load, its enterprise value stands at $15 billion. Penn estimates that this ESPN partnership could eventually generate $1.5 billion in annual incremental EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), surpassing its previous projection of $2 billion EBITDA for the existing business.
However, the reality of the sports betting industry is somewhat gloomy. Heavy investments in marketing and technology to acquire customers have resulted in billions of dollars in losses for the industry. Penn, for instance, spent a total of $550 million to acquire Barstool, not to mention the associated operating and capital costs. As a result, Penn will effectively return Barstool to Portnoy for free. Nevertheless, Disney saw value in the knowledge and expertise gained from this partnership.
Overall, Disney is taking a reputational gamble by entering the world of sports betting, and only time will tell if it pays off.
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