Industry analysts at Barclays and Deutsche Bank have flagged various challenges in Boyd’s potential bid for Penn Entertainment, including Penn’s complex ESPN Bet deal with Disney and the product being seen as undervalued by the market.
Reuters reported today (21 June) that US casino operator Boyd Entertainment has presented Penn with a takeover bid that valued the latter at over $9bn.
Both Deutsche Bank and Barclays expect Penn would not be interested in a deal with that proposed valuation. Penn would unlikely be a “willing seller” at this time and the deal would present challenges for Boyd, Barclays suggested.
In a note on Friday, Deutsche Bank said it believed the valuation cited in the report was incorrect. Instead it estimated that Penn was trading at ~5.1x 2024 enterprise value (market cap + traditional net debt) to EBITDA.
The note said the deal could result in a very favourable transaction for Boyd at the right valuation ($25-$30 range). Penn currently has an enterprise value of between $13.5bn and $13.6bn.
Issues that could derail Boyd’s potential Penn bid
However, both banks foresee various issues that could stifle acquisition talks. For example, Barclays believes Penn has more confidence in its digital strategy than the market currently does.
While Barclays also said it expected Penn to have more confidence in ESPN Bet’s ability to “gain ground from here, versus what the market expects, and its current share price implies”.
In May activist investor Donerail Group urged the company to sell assets to generate “meaningful and certain” value creation for investors.
At the time the hedge fund manager said: “While we understand that ESPN Bet appears as the company’s newest bright and shiny object that may very well have significant value under the right owners, we ask that the board take a moment to reflect objectively on the past four years of execution, assess the shareholder capital that has been destroyed and recognise that shareholders may simply be tired of continued gambling on uncertain outcomes.”
Penn’s interactive revenue, including ESPN Bet, fell 11.1% to $207.7m over Q1, which Penn attributed to unfavourable hold on the major sporting events over the quarter.
Deutsche Bank said it believed the market was likely pricing in little to no equity value for Penn’s B2C interactive assets in its valuation of the overall business.
Impact on Disney
On Monday (17 June) Truist Securities said it thought the market undervalued Penn’s ESPN Bet product as it has provided Disney with third party access to the gambling market.
Given Disney’s positioning and legacy company culture, it is unlikely the media and entertainment giant would seek to enter the regulated gambling market directly as an operator or licence holder.
A Boyd takeover could therefore present complexities in the ESPN/Penn partnership.
“We see ESPN Bet as a core tenant of Disney’s ESPN direct-to-consumer strategy and are encouraged by both companies’ commentary about deeply integrating [ESPN and ESPN Bet],” Truist said in a note.
“An integrated betting application seems to be a strategic priority to Disney’s wider digital strategy,” it added.
Penn signed its $1.5bn licensing deal with ESPN last year, and per the agreement, Penn will operate ESPN Bet while ESPN promotes the app across its online and broadcast platforms. Penn’s rights to the ESPN Bet brand will initially run for 10 years, with the option to extend for another decade.
“In the event a deal is agreed upon that exceeds the strike prices of the general warrants issued to ESPN Bet (12.7m shares at $26.08/12.8m shares at $29.99/7.3m shares at $32.60), how are they treated with a third-party buyer?” Deutsche Bank concluded.
Shares in Penn Entertainment jumped yesterday when the Reuters story broke, but are currently trading down 2.57% at $19.52 per share in New York. Shares in Boyd, meanwhile, are up 1.42% at $53.43 per share.
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