Penn Entertainment’s (NASDAQ: PENN) 10-year, $1.5 billion sports betting partnership with ESPN could provide two rivals with near-term cost savings.
The Penn/ESPN pact, which was announced last week, means the sports network will terminate similar deals with Caesars Entertainment (NASDAQ:CZR) and DraftKings (NASDAQ:DKNG) that were reached in September 2020. ESPN is reportedly already in the process of ending its arrangements with those two gaming companies, which could result in significant cost savings for the duo.
In September 2020, the parties didn’t reveal the lengths of the contracts nor the financial terms, but there’s time remaining on the accords and it’s been speculated that ESPN has been raking in roughly $75 million annually from the deals. Said another way, the $150 million annually Penn will pay the network over 10 years for use of the ESPN Bet brand will be somewhat defrayed by the loss of the Caesars and DraftKings economics.
Perhaps related to the new agreement with Penn, ESPN parent Walt Disney (NYSE: DIS) recently revealed that it sold its remaining equity interest in DraftKings in a transaction worth approximately $90 million. At one point, Disney owned six percent of DraftKings non-voting equity, which the entertainment conglomerate got via its 2019 $71.3 billion takeover of 21st Century Fox.
Caesars Could Really Benefit
It’s rumored that the Caesars/ESPN agreement is financially larger than the network’s partnership with DraftKings.
With Caesars looking for avenues to save capital and reduce its debt burden — one of the largest in the gaming industry — rumors surfaced earlier this year that the casino operator would like to be set free of its contract with ESPN.
Owing to a physical footprint, there could be truth to the assumption that Caesars has a larger financial arrangement with the sports broadcaster than does DraftKings. In September 2020, the Daily Wager betting show began broadcasting from inside a studio at LINQ Hotel on the Las Vegas Strip. Caesars controls that gaming venue.
For now, it’s not clear how Caesars and ESPN will deal with the show’s presence at the LINQ. It might not need to be dealt with. After all, DraftKings-owned VSiN broadcasts shows from Circa Las Vegas, which has an online sports wagering business that competes with DraftKings.
Benefits for DraftKings, Too
Assuming that ESPN is “losing” roughly $75 million a year by severing ties with Caesars and DraftKings and that the casino operator will benefit in larger proportion, that doesn’t mean DraftKings isn’t benefiting.
The online sportsbook giant and iGaming operator recently notched its first profitable quarter and if management chooses to deploy the capital conserved from the end of the ESPN pact in efficient fashion, shareholders could potentially benefit.
DraftKings hasn’t publicly commented on how it could deploy that saved cash, but a share repurchase program — a rarity among emerging growth companies — would likely delight investors, particularly against the backdrop of insider. A new batch of filings with the Securities and Exchange Commission (SEC) indicate four DraftKings insiders, including the three co-founders, recently sold a combined $22 million worth of the operator’s shares.
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