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ESPN’s $2B Penn Deal Means DraftKings, Caesars Cash Cut
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- ESPN’s $2B Penn Deal Means DraftKings, Caesars Cash Cut
ESPN's foray into sports betting won't come cheap for Penn, which has committed to paying roughly $2 billion in cash and equity over the 10-year partnership.
It also won't come cheap for ESPN, which is in the process of terminating two integrated marketing deals with Caesars and DraftKings to clear up rights for ESPN Bet. Those two deals are worth nearly half of the annual $150 million cash payment that will ESPN will get from Penn, according to multiple people familiar with the terms.
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On Tuesday, ESPN made its long-anticipated push into sports betting, announcing a decade-long licensing deal with Penn Entertainment that will see the Barstool Sportsbook rebranded as ESPN Bet later this year. According to the announcement, the new sportsbook will have rights currently held by two of Penn's biggest competitors.
It shouldn't be difficult for ESPN to get out of those deals. Both contracts contain specific language that gives ESPN an out if the company launches its own branded sportsbook, according to the sources, and the 30-day wind-down period has already started. So while ESPN is set to receive an average of $150 million per year in cash from Penn, it is likely giving up roughly half as much elsewhere on its balance sheet.
It's unclear when exactly those two deals, which were announced in September 2020 only as "multiyear," expire. Representatives from ESPN and DraftKings declined to comment. A spokesman for Caesars didn't immediately respond to an email seeking comment.
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Penn's stock (Nasdaq: PENN ) rose 9% in Wednesday trading following the news. Disney (NYSE: DIS ) and Caesars (Nasdaq: CZR ) were relatively flat, while DraftKings (Nasdaq: DKNG ) fell 11%.
ESPN has for years weighed the pros and cons of launching a sportsbook of its own (or lending its name to one). As it mulled those options, the company signed a pair of " co-exclusive " integrated marketing deals with Caesars and DraftKings. The deals gave the two sportsbooks various rights across ESPN properties and include incentives for each new user registered via ESPN.
The Caesars relationship is the bigger of the two, in part because it includes a Las Vegas studio at the Linq Hotel + Experience, a Caesars property. Much of ESPN's growing suite of gambling content, including its Daily Wager TV show, calls that studio home. Details about how the two sides unwind the physical parts of that relationship will likely come at a later date.
Those two deals will need to be unwound because Caesars and DraftKings are currently paying for rights that ESPN will want to keep exclusively with its own branded sportsbook. Later this year, when people look at a box score on ESPN.com, or Pat McAfee discusses a line on his popular daily talk show, they will center around odds provided by ESPN Bet, not a competitor. The new Penn deal also includes database marketing opportunities and access to ESPN personalities, Penn CEO Jay Snowden said Wednesday in an earnings call.
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ESPN's various negotiations over a branded sportsbook included lengthy conversations with DraftKings, according to multiple people familiar with the talks. The two have a multi-faceted relationship—Disney owns a 4% stake in DraftKings that it acquired in its 2017 deal for 21stCentury Fox. Last October DraftKings stock jumped more than 8% after multiple reports that the two companies were close to a larger exclusive marketing deal.
The ESPN Bet launch doesn't mean DraftKings or other sportsbooks can no longer advertise with ESPN in any capacity. Penn will have some exclusive advertising opportunities with ESPN as part of the deal (that could include especially valuable ESPN properties like Monday Night Football ), but other sportsbooks can still buy some ad space during commercial breaks, according to Snowden.
In addition to the $2 billion in cash and equity warrants, ESPN could receive a bonus of up to 6.4 million more Penn shares if ESPN Bet hits certain undisclosed thresholds. Snowden hinted in the call on Wednesday that those thresholds include a 20% market share for the sportsbook.
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