ESPN Penn Entertainment Deal Is Disney’s First Move Into Sports Betting

Key Takeaways

• ESPN and Penn Entertainment have entered into a multi-year sports betting deal
• The move comes as Disney weighs up ESPN’s shift to direct-to-consumer content
• Penn shares shot up as high as 20%, but Disney’s mixed earnings beat swayed the stock on the downside

Sports channel ESPN and betting company Penn Entertainment have announced a multi-year, multi-billion dollar deal to tap into the rapidly growing sector. It’s a nut other media companies have struggled to crack, but with Disney’s hulk behind it, the deal could represent a new revenue stream for the Magic Kingdom.

With the ESPN and Penn Entertainment deal, Disney is officially entering the world of sports betting. The move has raised a few eyebrows at what Disney has planned long-term, especially after a mixed earnings beat, but it was great news for Penn stock. We’ve got the details and what the stock market reaction was below.

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What’s the ESPN Penn deal?

ESPN has agreed for betting company Penn Entertainment to use its brand for its online betting business in a ten-year agreement worth $2 billion. Penn Entertainment confirmed it would be rebranding its Barstool Sportsbook app as ESPN Bet, with Penn paying $1.5 billion over the decade for the rights; ESPN will also get about $500 million in warrants to buy shares in Penn.

Penn, which has struggled to find its way in the U.S. sports betting space, predicts the agreement will generate between $500 million to $1 billion of annual long-term earnings.

The newly rebranded ESPN Bet app will be promoted on the broadcaster’s streaming services and will have access to the full breadth of ESPN talent. While ESPN had some existing ties with sports betting companies Caesars and DraftKings, both agreements are anticipated to be phased out in favor of the Penn deal.

The chairman of ESPN, Jimmy Pitaro, said of the deal, “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”.

At the same time, Penn has also sold its subsidiary Barstool Sports back to its founder, David Portnoy, in exchange for half of the proceeds if he chooses to sell the brand again. Penn originally bought Barstool Sports for $550 million, and the company is believed to have been sold back for $600 million.

Disney’s mixed earnings beat

The ESPN and Penn deal accompanied Disney’s lukewarm earnings report. Revenue for the fiscal third quarter was $22.3 billion, up 4% from a year ago but missed Wall Street’s forecasts of $22.5 billion. On the upside, earnings per share were at $1.03, beating consensus estimates of 97 cents per share.

With disappointing performances for big movies and shows, Disney’s Media and Entertainment Distribution division made $14 billion for the quarter, declining 1% from a year ago and missing estimates of $14.3 billion.

However, the Disneyworld business is booming. The Parks, Experiences and Products segment brought in $8.3 billion, which beat the forecasted figure of $8.1 billion and is a 13% increase from last year.

ESPN’s future at Disney

ESPN, owned by media titan Disney, has valuable brand capital that any betting company would kill to get their hands on – but at the same time, it’s at odds with Disney’s family-friendly face. If Disney can bring ESPN into the direct-to-consumer fold, it could significantly help the company’s pivot to streaming.

There was specific mention of ESPN on the earnings call, where Disney CEO Bob Iger said it was “not a matter of if but when” the sports entertainment brand offered a direct-to-consumer streaming service. Iger also commented that total domestic sports advertising revenue has risen 10% since last year.

Looking at Disney’s existing direct-to-consumer business, such as Disney+, the segment posted $5.5 billion in revenue, a 9% increase from last year. It fell slightly short of the predicted $5.7 billion investors expected, but a near double-digit growth isn’t to be sniffed at. It’s also a stark contrast to the linear networks revenue, which declined 7% to $6.7 billion.

As for new subscribers, Disney+ ended the quarter with 105.7 million subscribers, a 1% growth from last year’s same quarter and a slight increase from the previous quarter’s figure of 104.9 million.

Disney has apparently “received notable interest from many entities” in a bid to bring on a strategic partner for ESPN and also wants to increase the amount of content the brand offers to make the transition to a full streaming service. The Penn Entertainment deal clearly helps with that aspect, especially considering the gambling sector generated $7.5 billion last year.

With this much investment going into the sports brand, it’s unlikely that Disney would sell ESPN now – but never say never.

How did Wall Street like the news?

The news was a boon for Penn Entertainment’s share price, which soared nearly 20% at the announcement. It settled to close Wednesday’s trading nearly 10% up.

On the other hand, Disney suffered due to the mixed earnings beat and the stock finished the day 0.7% lower. The stock has seen a 1.3% uplift in premarket trading due to a crackdown on password sharing anticipated by the House of Mouse.

Other rival sports betting companies weren’t so lucky. DraftKings, which won’t have a tie-in with ESPN moving forward, closed 10.8% down on Wednesday. Caesars Entertainment’s share price declined nearly 2%, while MGM Resorts lost 0.5%. Despite a positive earnings beat, Flutter’s share price fell 3%.

The bottom line

The multi-billion dollar deal between ESPN and Penn Entertainment marks a significant shift in the sports betting landscape and Disney’s strategic direction. The deal and Disney’s plans to expand ESPN’s content reflect a broader push into new revenue streams and align with emerging market trends.

Wall Street’s reaction underscores the perceived potential for the deal to bring in a significant chunk of revenue for Disney. Or is it just making ESPN a more attractive prospect before selling? All’s to play for.

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