A letter from a major shareholder has brought fresh scrutiny on PENN Entertainment and its multi-billion dollar investments in online sports betting and iGaming.
In a public letter published Friday, Donerail Group managing partner Will Wyatt said the digital investments “irrespective of past results and without a clear return framework, has significantly damaged the credibility of this management team and Board of Directors.”
“We question whether such credibility is beyond repair, as PENN’s shares are now down over 80% in the last three years because of such damage,” wrote Wyatt, whose group has invested in PENN for over a decade.
The letter from one of PENN’s most prominent investors raises new questions about the company’s sustainability in the online space. PENN, first via its Barstool Sportsbook and now ESPN BET, has failed to crack single-digit national market share at any point in the six years since the Supreme Court struck down the federal wagering ban.
PENN’s online pivot
PENN Entertainment, formally PENN National Gaming, operates the nation’s largest portfolio of brick-and-mortar casinos. Though it doesn’t have a presence in high-profile markets such as Las Vegas or Atlantic City, the company’s 43 properties are spread across 20 states, most of which they are the leading operator, a structure Wyatt applauded in Friday’s letter.
He questioned the company’s online gaming push.
Since CEO Jay Snowden was appointed in January 2020, PENN has invested hundreds of millions of dollars in online casino gaming and, more notably, sports betting. Between 2020 and 2023, the company spent more than $550 million to acquire 100% of the Barstool Sports media company, predominately to brand the company’s sports betting app. The company also acquired Canada’s theScore media outlet and its eponymous sportsbook and tech platform for another $2 billion.
Despite the massive investment, Barstool Sportsbook never came close to the roughly 35% nationwide market share of both DraftKings and FanDuel or the low double-digit shares of fellow casino-operator sportsbooks BetMGM and Caesars. PENN announced it would shutter the Barstool Sportsbook last year and sold Barstool Sports back to founder Dave Portnoy for $1 in August 2023.
PENN then doubled down with a 10-year, $1.5 billion partnership with ESPN to rebrand PENN’s sportsbook under the ESPN name. ESPN BET is live in 18 states and paid Wynn $25 million for its license in New York, the nation’s largest gaming market, which it hopes to enter later this year.
Even with the high-profile new partnership, ESPN BET has not come close to its rivals’ market share.
Fueled by free bets and marketing costs around the newly rebranded sportsbook, PENN reported hundreds of millions of dollars in losses in the first quarter of 2024, with more loses expected for the full calendar year. It trails the aforementioned market share leaders in all states with publicly available operator revenue reports, and even some smaller and up-and-coming brands.
Meanwhile, the app itself has been criticized by industry stakeholders as unable to contend with the tech platforms of other major operators. PENN’s online casino product, formally under the Barstool brand and now under its Hollywood moniker, is also a comparatively minor player in the space.
Meanwhile, Snowden has nearly $100 million in compensation in the past four years, which Wyatt highlighted as another criticism of company management.
“Absent an immediate strategic shift, we believe that the Company’s equity price will continue to stall, and shareholder returns will stay muted,” Wyatt wrote.
Future PENN moves
Wyatt argued in Friday’s letter these actions warrant the company to consider selling its brick-and-mortar casino properties, which could generate an estimated $5.9 to $6.9 billion in a sale transaction. Wyatt’s proposal would indicate a move to detach PENN’s revenue-generating retail casino division from the massive losses in its online endeavors.
PENN stock was up as much as 18% during intraday trading Friday after the letter was published.
$PENN Entertainment stock is now up more than 18% on a rough overall day for much of the market after a major investor published a letter questioning, most notably, the company's online (RE Barstool and ESPN Bet) strategy
— Ryan Butler (@ButlerBets) May 31, 2024
Though it remains unclear when, how or even if a split between PENN’s retail and online divisions would occur, the letter reignites questions about ESPN BET’s long-term viability. Though PENN officials have been publicly bullish about the sportsbook’s prospects, projecting it could contend for as much as 20% nationwide market share, there is sizeable ground to make up on its rivals.
DraftKings and FanDuel have appeared increasingly like a national industry duopoly, fueled by their massive array of single-game parlay offerings ESPN BET and few other operators can match. The major casino brands, Caesars and BetMGM, have started showing profits after years of losses. Up-and-coming brands in the U.S. including Fanatics, Hard Rock and bet365 have also established themselves as formidable players.
ESPN has started featuring ESPN BET odds more prominently on its eponymous app, and the sportsbook is expected to be more integrated into company programming ahead of the upcoming fall football season. Whether this integration can attract sports bettors from other books and/or generate new players remains to be seen.
However, moves like Wyatt’s letter underscore the increasing pressure PENN has to generate positive momentum after several years – and several billion dollars in investment. Though other books, notably DraftKings and FanDuel, posted quarter after quarter of multi-hundred-million dollar losses, they now have clear paths to positive earnings.
Even at 10% market share, it could take PENN years to break even from the previous expenditures, a challenge few companies seem capable of undertaking. Roughly a dozen brands, including other casino property owners such as Wynn and Churchill Downs, have effectively ended their online gaming efforts after far smaller investment losses.
ESPN parent Disney, itself under increasing investor pressure after massive digital investment losses, has a right under the PENN deal to end the affiliation after only a few years. Losing a second major brand in less than a decade, PENN’s online division could face an even more daunting future.
“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,” Wyatt wrote, “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.”
