Disney, the media giant, saw an increase in its stock price on Wednesday as investors eagerly awaited the company’s earnings report. The cause of this optimistic market reaction can be attributed to the recent partnership between Disney-owned ESPN and Penn Entertainment. However, upon closer inspection, it becomes apparent that this deal may not be as favorable as it initially seems.
Under the agreement, ESPN has sold exclusive rights to the “ESPN Bet” trademark to Penn for a decade. The deal involved a cash payment of $1.5 billion and $500 million worth of Penn warrants. In exchange, Penn receives media, marketing, and brand rights to ESPN, granting them promotion across various platforms and access to top-notch talent.
As a result of this partnership, shares in Penn, which is considered a second or third-tier sportsbook by Lightshed analyst Richard Greenfield, surged by over 15% on Wednesday. Investors understandably celebrated Penn’s newfound association with the premier U.S. sports media brand. However, this positive outcome came at the cost of effectively relinquishing ownership of Barstool Sports, which will now revert back to its founder, Dave Portnoy. This exchange alone raises questions about the overall balance of the deal and suggests that Disney’s 1% early stock advance may not be sustainable in the long run.
Greenfield’s note from Lightshed on Wednesday sheds light on the less favorable aspects of the deal for Disney. It appears that Penn Gaming may have been ESPN’s last choice as a partner. Former CEO Bob Chapek had previously explored a $3 billion, 10-year licensing deal with gambling companies, but the sportsbooks deemed this valuation to be too high. Consequently, Greenfield points out that almost all major sportsbooks declined the opportunity, leaving only Penn willing to provide ESPN with a substantial, albeit lower than desired, annual licensing fee for the ESPN brand. This situation indicates ESPN’s increasing financial strain due to rising programming costs and revenue pressures.
Considering these circumstances, it is natural to wonder about Disney’s underlying strategy for ESPN moving forward. The current deal leaves room for speculation and raises doubts about the long-term implications of this partnership on Disney’s plans for its sports media asset.
ESPN’s Partnership with Penn Raises Concerns
Disney’s recent 10-year deal with Penn, the parent company of sports betting platform Barstool Sports, has raised doubts about the strategic options available for ESPN. While some had hoped for a merger with industry leaders like FanDuel or DraftKings, these options are now off the table.
One of the main challenges Disney faces is finding investors for ESPN. As industry analyst Richard Greenfield points out, potential investors may be deterred by Penn’s inferior technology and reputation compared to other market leaders in sports betting. Why would sports leagues or distribution platforms want to be associated with a platform that is not considered the best in its class?
Furthermore, Greenfield raises questions about Disney’s decision to sell ESPN to a group that lacks licenses in key states like Connecticut, New York, Florida, and California where both Disney and ESPN have a significant presence. This move seems unusual and raises concerns about the long-term viability and success of this partnership.
Greenfield’s analysis suggests that Disney’s timing in announcing the Penn deal may be an attempt to divert investor attention away from its near-term struggles. With weak earnings expected and lowered expectations for the future, Disney is looking for something new to captivate investor interest and confidence.