Penn sold Barstool to Dave Portnoy for $1 in exit Jay Snowden called ‘obvious to both parties,’ which set up ESPN Bet deal

On Tuesday, a major sports media shift occurred, with Penn Entertainment signing a deal to rebrand their Barstool Sportsbook app as ESPN Bet. Around that, Penn also transferred Barstool Sports back to founder Dave Portnoy in exchange for $1, non-compete agreements, and a 50 percent stake in further sales or monetization ventures from Barstool. Alex Weprin of The Hollywood Reporter confirmed a sale price of $1 Wednesday afternoon:

New: I've confirmed that Dave Portnoy bought back Barstool Sports for $1. Penn Entertainment says it will record a loss of up to $850M on the deal. https://t.co/qQipoNwkXW

— Alex Weprin (@alexweprin) August 9, 2023

And yes, this transaction came at a purchase price quite different from the combined total of $551 million Penn paid for Barstool over the years ($135 million in cash and $28 million in stock for an around 36 percent minority stake in January 2020, $388 million for the rest of the company in February). And this is going to lead to a notable writedown for Penn, which Weprin writes that a SEC filing estimates as between $800 and $850 million. (Writedowns are not all bad for companies, though, as the current waves of companies taking those from removing streaming content indicate. They can provide some tax incentives and some ongoing benefits.)

And there’s maybe some larger logic here for Penn, especially in making this move at this time. It’s quite possible they could have sold Barstool back to Portnoy for more if they’d waited a bit for him to raise funds, but that would have stopped this ESPN deal. And Penn has managed to get in on this ESPN deal, which a lot of smaller (non-DraftKings or FanDuel) betting operators might have loved, at an important time around a lot of consolidation in that market. And they’ve done so thanks to an offer “by far” better than any competitor (as per Disney CEO Bob Iger), and that was possible thanks to this quick exit from Barstool.

Penn CEO Jay Snowden covered some of his company’s rationale on an earnings call Wednesday. There, he said he thinks this ESPN deal will take them to a new level. That included “I think we have an opportunity to really get in here and be a major player.”

The November timeline for converting “Barstool Sportsbook” to “ESPN Bet” seems not ideal to much of the outside world, with both the college football and NFL seasons well underway at that point. But Snowden said he thinks that may actually be an important advantage for them, especially with it being a ways away from when other players are offering promos.

“I actually think the timing of our launch here in November is good. It’s not going to get lost in football season,” Snowden said. “Midseason, we’re going to be offering something that isn’t being offered by a lot of others. …The launch timeline is really good in this case.”

Also in comments perhaps contrary to the conventional wisdom, many would see spending $551 million for an asset you sell for $1 as a bad thing. But there are some additional considerations there, including non-competes (so Barstool can’t go for gambling ads) and the rights to 50 percent of the take if Portnoy does sell or remonetize the company. And Snowden had some notable comments on why the Barstool deal made sense in 2020, the value they’ve seen from it since (including bettor signups, and signups of bettors he doesn’t think will have high overlap with the ones they’ll get from ESPN), and why it now makes sense for the sides to part (especially around growing conflicts between regulators’ asks of Penn and Barstool’s content desires).

“We felt great at the time that we were partnering and launching with Barstool, and we had a great three and a half years,” he said. “It became obvious to both parties that there’s quality to one long-term natural owner of Barstool, and that’s Dave Portnoy. …Everyone’s feeling good about the future.”

A big part of what’s notable about Penn’s ESPN deal is that nothing on this level would have been possible when they initially struck their Barstool deal in January 2020. At that point, Iger was still the Disney CEO (before his February 2020-November 2022 exit in favor of Bob Chapek), and he had long publicly spoken against getting involved with sports gambling (even after the 2018 Supreme Court ruling against the Professional and Amateur Sports Protection Act of 1992 (PASPA), which paved the way for today’s gambling environment).

Indeed, Iger said in February 2019 “I don’t see The Walt Disney Company, certainly in the near term, getting involved in the business of gambling, in effect, by facilitating gambling in any way.” And that came after 2015 Disney plans to invest in DraftKings (solely a daily fantasy company at that point) they eventually walked back from, instead just striking an advertising deal.

DraftKings wound up getting funding from a Fox-led group instead. And Disney actually wound up acquiring that five percent stake in May 2019 as part of the larger Disney-Fox deal despite Iger’s previous comments. And, interestingly enough, around this deal with Penn, Disney sold that stake, and gained about $90 million in the process. So that worked out for them.

With any discussion of sports gambling ventures with media arms, customer acquisition costs come up. Indeed, the whole theory of betting firms’ ties with media outlets is about lowering those CACs, something Betr in particular has played up about their media arm. Snowden said Wednesday he thinks the ESPN deal puts them in a new category, though.

“Because of our media relationships, we can run best in class customer acquisition costs,” he said. “There are certain things that our partnership with ESPN gives us that others won’t be able to estimate.”

There’s obviously still a lot to be determined with Penn, Barstool, and ESPN. And we’ll see how it all goes. But it’s interesting to hear the Penn rationale for why they made this move.

[The HollywoodReporter, Penn Entertainment Q2 earnings call webcast; image from a 2022 Snowden interview with GGB Podcasts]