For most politicians — dictators excepted — getting 58.7% of votes in an election is a good outcome. But for PENN Entertainment Inc., the same number might signal discontentment among shareholders who may harbor concerns about the gaming operator’s online sports betting strategy and partnership with ESPN.
Wyomissing, Pa.-based PENN reported last week that approximately 58.7% of shares cast on an advisory vote on executive compensation supported that pay package.
However, 21.4 million shares were not voted one way or another and there were 328,907 abstentions, meaning just 48.8% of total shares backed the compensation plan for execs at the ESPN BET-operator. In 2023, 76.5% of all shares were in favor of the executive compensation package at PENN.
This year’s vote also saw 34.3% of shares cast against the executive pay plan, compared to 8.4% a year ago.
Nattering nabobs of negativity?
So what changed? Why the weaker support for PENN executive pay this year compared to last?
Most notably, it's no secret that a few significant PENN shareholders have been voicing concerns about the company's strategy, particularly when it comes to spending on online sports betting and iGaming.
Those concerns were highlighted on May 31, when Will Wyatt, managing partner at Donerail Group LP, outlined the financial services firm’s worries about PENN's plan, taking aim at the digital strategy and executive pay along the way.
Donerail said the PENN board of directors has overseen billions of dollars in spending on "failed" online gambling deals, including a pre-tax loss of nearly $1 billion taken by the company in buying and then ridding itself of Barstool Sports, its previous online sports betting brand.
Other objects of scrutiny for Donerail were PENN's $2-billion purchase of theScore and hundreds of millions of dollars more used for its latest OSB/iGaming foray with ESPN BET. The relatively new online sportsbook is the product of a 10-year, $2-billion partnership between PENN and ESPN.
“While we understand that ESPN BET appears as the Company’s newest bright and shiny object that may very well have significant value under the right owners, we ask that the Board take a moment to reflect objectively on the past four years of execution, assess the shareholder capital that has been destroyed, and recognize that shareholders may simply be tired of continued gambling on uncertain outcomes,” Wyatt wrote in a letter to PENN chairman David Handler.
A recent note from Citizens JMP Securities showed ESPN BET had a roughly 3% share of gross sports betting revenue in April, well behind leaders DraftKings and FanDuel at 33% and 48%, respectively.
According to JMP, ESPN BET's peak market share was back in November, the month it launched, when the operator managed to snag 10% of sports betting revenue.
Per JMP Securities, ESPN BET has been downloaded more than 1M times since launching last week, "the most downloads over a multi-day period in the history of online gaming."
— Geoff Zochodne (@GeoffZochodne) November 22, 2023
The new online sportsbook accounted for 70% of U.S. app downloads among operators with ~95% market share. pic.twitter.com/LsWPua48ra
Wyatt added that PENN CEO Jay Snowden has been paid "handsomely" amid this spending and a roughly 42.8% decline in the company's stock price since taking over the chief executive job.
Snowden earned $15.5 million in total compensation for 2023, PENN's proxy statement showed, which includes cash and stock awards. Between 2020 and 2023, Donerail said PENN's board approved $99.3 million in total compensation for Snowden, "making him one of the highest paid” U.S. execs.
“Concerningly, it appears that the Board has an obstinate and heightened level of confidence in the Company’s management team, willing to compensate the Company’s Chief Executive Officer exorbitant amounts of money, notwithstanding the continued earnings misses, guidance cuts, and stock price underperformance,” Wyatt wrote.
'Reasonable and appropriate'
Earnings+More also noted on Monday that around a quarter of shares were cast against the re-election of Handler. One unnamed insider quoted by the newsletter called the vote numbers "pretty dismal results," especially with no competing candidates.
But, as noted by E+M, Donerail's letter perhaps came a little too late in the game to sway the shareholder vote further. What’s more, PENN's board unanimously recommended a vote in favor of the executive pay.
“We believe shareholders should approve the Company’s compensation program because it is appropriate in the context of industry standards and is heavily weighted towards performance-based compensation that aligns executive compensation with the long-term strategic plans of the Company and shareholder interests,” the proxy statement said, adding that “the Committee believes the 2023 compensation paid to Mr. Snowden, the Company’s Chief Executive Officer, is reasonable and appropriate in light of the Company’s scale, objectives, achievements and performance.”
Nevertheless, all of the above highlights how much is at stake with PENN’s ESPN BET play. Any setback could give further ammunition to the company’s skeptics, who may prefer PENN focus on its 40-plus casino and racetrack properties, while successes could beat back the naysayers.
Donerail floated the idea of selling PENN entirely, saying that the “fundamentals of the [brick-and-mortar] casino portfolio are currently doing well.”
While that possibility may still be a ways off, the recent ups and downs on the digital side of the business have cracked open the door to thinking about a change in direction.
“Our view is that irrespective of the outcome of the current process, revisiting the current path of investment and returns is warranted, given the current competitive landscape in digital and the uncertainties around the investment required to capture the stated share goals," Jefferies analyst David Katz wrote in a May 31 note to clients.
