The Greatest Business Deal of the Last Decade

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To investors,

Dave Portnoy, the founder of media company Barstool Sports, just pulled off the greatest business deal of the last decade. This transaction will be studied in business schools for years to come.

To understand how this happened, we must first understand what makes Barstool Sports special. I wrote an article more than 6 years ago that explained it in the following way:

“The Barstool Sports magic is driven by charismatic personalities, a cultural obsession with memes / humor, and a system level evolution in distribution platforms. Gone are the days of writing long form, serious content. The last five years have ushered in an acceleration of shareable, humorous content in reaction to the shift in consumer interests and decreasing attention spans.

The focus on “clicks” by media empires was once a recipe for success, but is now a bee line to negative unit economics and the inherent fall from grace that follows. Somehow a formerly small, unknown sports blog from New England avoided the errors of their idols and figured out the media model of the future.”

Simply, the company figured out how to do something different and it resonated with a large audience. Readers and viewers were not the only people who noticed. Barstool Sports was able to solicit a number of different investors to put money into the business over the last few years.

• January 2016 — The Chernin Group buys 51% of Barstool Sports for a rumored $7-10 million

• January 2018 — The Chernin Group invests $15 million at $100+ million valuation

• January 2020 — Penn National buys 36% of Barstool Sports for $163 million

• February 2023 — Penn National buys the remainder of Barstool Sports for $388 million

As of February 2023, Penn National owned 100% of Barstool Sports and they had paid $551 million for it. Not bad for a company that started out 20 years ago as a free physical newspaper handed out personally by the founder.

But the deal between Barstool Sports and Penn National did not come without challenges. Penn is in the casino and gambling business, which is highly regulated. Dave Portnoy and Barstool Sports are a regulators’ nightmare.

So it was clear how Barstool could bring more awareness and users to Penn, but it also became obvious that Barstool was making life more difficult for Penn as well.

This is where ESPN comes in. The media company has been trying to figure out how to get into the gambling business for awhile now. Their traditional revenue business is struggling as consumers ditch cable networks and the overlap with gambling for a sports broadcast network is a no brainer.

ESPN is a media company. Penn National is a gambling company. And yesterday they announced that the two companies are going to enter into a 10-year partnership. Penn will pay ESPN $1.5 billion over 10 years, along with grant them $500 million of warrants to purchase 31.8 million Penn common shares. There will be a new sportsbook, called ESPN Bet, that is launched out of the partnership.

This left open the question — what about Barstool?

Barstool and ESPN have a long history of not getting along. They have tried to work together in the past, but a TV show collaboration lasted less than a week. Portnoy and the Barstool team have also spent years mocking and ridiculing ESPN and their staff. It would be an understatement to say the two companies despise each other.

Penn National had to make a decision about what to do with Barstool. It appears they couldn’t sell the property to a competitor, which is not surprising given how controversial Barstool has become over the years. So Penn did the next best thing — they sold the company back to founder Dave Portnoy.

The announcements yesterday read “Dave Portnoy buys back Barstool Sports!” Suspiciously there was no purchase price though. Since Penn is a public company, I knew they would have to disclose the information so I went to read the public filing. My mind was blown when I read the details of the deal.

Dave Portnoy paid $0 to purchase 100% of Barstool Sports. Yes, you read that right. The man who started a company that was purchased for $551 million less than 9 months ago is now back in full ownership of his business for no additional money.

Penn National made Dave agree to a non-compete, which means he can’t launch a sportsbook in the future, and a number of other non-monetary covenants, including a rumored clause that won’t allow other gambling companies to advertise with Barstool Sports. Penn also negotiated to receive 50% of any future sale or monetization event with Barstool.

Those concessions from Dave and his team are cute, but they still paid $0 to get Barstool back. And during Dave’s video announcing the deal yesterday, he mentioned that he will never sell Barstool again, so my guess is that Penn will never see another dollar from Barstool Sports.

Dave Portnoy is now the full owner of a cash-flowing media empire that does hundreds of millions of dollars. He monetized his ownership once and then he just pulled off one of the greatest business deals of the last few decades.

What a wild world we live in.

Hope you all have a great day. I’ll talk to you tomorrow.

-Pomp

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