The Wall Street Journal reported on January 29th that Penn National Gaming (PENN) would be buying a 36% stake in Barstool Sports at a $450 million valuation ($135 million in cash + $28 million in convertible preferred stock). After three years, the regional gaming provider can increase its interest in the digital media entity to 50% (with an incremental investment of $62 million); the pact includes a path to majority or full control. The deal makes the casino operator the ‘exclusive gaming partner’ of Barstool Sports (for a period up to 40 years) and gives the company the “sole right to utilize the Barstool Sports brand for all of [its] online and retail sports betting and iCasino products.” Shares of PENN are up +14% (to $29.91 at Monday’s close) since news of the agreement was announced.
Howie Long-Short: Considering The Chernin Group invested in Barstool Sports at a $100 million valuation in 2018, it’s staggering to consider PENN is buying in at $450 million. But one well-respected digital media executive said that 4.5x revenue (+/- $100 million) “seems right. Companies [in the space] tend to trade between 2.5-5x revenue.”
Gaming industry consultant Sara Slane suggested that even with a $450 million valuation, PENN is “getting a good deal. If you think about how much money DraftKings and FanDuel spent to build their brands (see: $206M on ads in ’15 alone) and compare that to what PENN just bought (think: access to +/- 66 million unique monthly users, +/- 50% of which are sports bettors) [the price is] a bargain.” Slane estimates that the two DFS companies have collectively spent more than $1 billion to date on player acquisition.
In theory a deal with Barstool Sports – a brand with a rabid following – makes sense for a gaming operator looking to build its player base. It’s presumed that the investment will allow the company to gain an audience quickly (critical in the current ‘land-grab’ environment) and to differentiate itself in a crowded space, but if the U.K. market is any indication the Stoolies are unlikely to remain loyal to just a single gaming application. The average online gambler in the U.K. maintains 4 different sportsbook accounts (so that they can shop lines for the best pricing). There’s no reason to believe that the U.S. sports bettor will behave differently.
That said, Barstool Sports’ young, male audience is particularly attractive to PENN, who’s core clientele is currently “the [mid-50s] woman who plays slot machines”, because it’s the demographic the company wants to drive into its brick and mortar properties. Slane said, “the cross promotional element of the deal is getting lost in [the talk surrounding Barstool’s valuation.] The thrust of the PENN business is their [expansive] retail operation. They have such a large footprint (41 properties across 19 states), but they’ve lacked brand awareness. Now they can market those properties under the recognizable Barstool brand [to the Stoolies].”
It’s important to delineate between the market access agreements that PENN previously struck with DraftKings, PointsBet, theScore and The Stars Group and their recent equity investment in Barstool. The main difference is that in the former PENN issued secondary skins in exchange for a cut of gaming revenues. In the latter PENN will retain 100% of incoming revenues on their first skin. Barstool is not entitled to any revenues associated with wagers placed.
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