Good morning. On this month’s Due Diligence agenda:

• Both Fanatics and ESPN Bet are ready to compete, but being competitive is another matter. We examine ESPN Bet and whether the ‘worldwide leader in sports’ can live up to the hype and meet its (self-imposed) lofty expectations.

• Meanwhile, Penn Entertainment’s Jay Snowden blames the failure of Barstool Sportsbook on its reliance on third parties.

• The perils – and extra costs – inherent in being a listed company are explained by Codere Online CEO Aviv Sher.

Put your head back in the clouds and shut your mouth.

Is Penn mightier?

The US sports betting market is about to be turned upside down with the entry of Fanatics and ESPN. Or is it?

What do you get for $2bn these days? ESPN Bet is the result of a $2bn deal between Penn Entertainment and ESPN, which will see Penn pay ESPN $1.5bn over 10 years along with $500m of warrants to buy 31.8m Penn shares.

• ESPN Bet will function on Penn’s proprietary theScore app.

• The app ranks around fifth in Eilers & Krejcik’s testing.

• Penn is currently licensed in 16 states.

• It does not have market access in New York, the top market in the US.

Who is the ESPN Bet customer? ESPN is a well-known, sports-centric brand, but so is FOX Sports, which didn’t prevent FOX Bet from going kaput. In its most recent survey results, Jefferies noted: “ESPN garners high recognition, but a thin majority (53%) would try the new OSB app.” Jefferies pinpointed two areas ESPN can leverage.

• 57% indicated that promotional offers were a primary driver to try ESPN Bet.

• 38% said familiarity and engagement with ESPN content would push them to take the app for a test drive.

• An Optimove survey of NFL bettors indicated that promotions swayed 48% of bettors, but only 17% chose content as a factor for using a betting site.

The glue is in the question: “Brand stickiness is higher than ever (83%), and ease of use remains most important with FanDuel and DraftKings retaining leadership,” Jefferies said. Ease of use also topped bettors’ wishlist in the Optimove study. ESPN is also a late entry into the US market.

• “Who is the customer that is not already betting,” Chris Grove from Acies Investments asked on X. “That is going to start betting because ESPN Bet exists?”

• “And who is switching from where they are currently betting because ESPN Bet exists?”

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Many roads

Is Penn on a road to salvation or nowhere: To be considered a success, ESPN Bet needs to do three things; activate new bettors who are in the ESPN universe but haven’t become bettors, poach customers from competitors with enticing promotions and, most importantly, retain both groups with a strong product and/or rewards structure

• It’s unclear how many people exist in category one.

• For Penn-ESPN to be effective, it will have to play the role of Mr. Steal Yo Girl in existing markets.

• These markets are already saturated with most bettors gravitating towards DraftKings and FanDuel – EKG’s #1 and #2 ranked apps.

The color of money: Penn is willing to spend. The company has indicated it will spend an additional $150m on external marketing in addition to the $150m it will spend on ESPN annually. But US bettors are proving to be a loyal bunch.

• As Jefferies indicated, just over 50% of existing bettors would be willing to give ESPN a chance.

• “89% of respondents indicated they are likely/very likely to continue betting with their current accounts.”

• Only 20% of bettors maintain three or more accounts, per Jefferies. That number was 18% in the Optimove survey of NFL bettors.

What does success look like? Given the cost, and Penn’s decision to cut its losses with Barstool, nothing short of a double-digit market share can be considered a success. Based on targets laid out by Penn, EKG estimates the company is aiming for a long-term market share in the 10-20% range.

• “Neither of us [Penn nor ESPN] are doing this deal to be in fourth, fifth or sixth place,” Penn Entertainment CEO Jay Snowden said. “We’re launching this to be a real top player; that’s the focus for 2024 and 2025.”

• That gives Penn-ESPN just over two years to become a competitive force in the US market, which aligns with the three-year-out the deal offers.

• Reviews are mixed. Analysts see the possibilities, but execution will be the deciding factor.

Ease on down the road: Circling back to ease of use being the most important factor for bettors, EKG’s Chris Krafcik said, “If the aim is to use the ESPN app to drive acquisition for ESPN Bet, the … user journey has to be better – so much better – than the maze-like ESPN [to] ESPN Fantasy user journey.”

• And one more from EKG: “While there may be a path to the lower end of the implied market share range [9-10%], the upper end [18-20%] feels challenging to us.”

Moment in the spotlight

Attention grabber: Even if the ESPN Bet bounce is short-lived, analysts at Deutsche Bank suggest Penn Entertainment should benefit from the attention. Saying the launch of ESPN Bet in November will drive “healthy” handle and GGR OSB market share gains in the short term, the team cautioned that the longer-term success of the project “will remain ambiguous” for this year at least.

• Deutsche Bank still has Penn Entertainment as a Hold due to that ambiguity.

• But the team said in its note it didn’t believe in the near-term there will be anything by way of anecdotal evidence to confirm or disprove “what already appears to be a somber outlook for the venture”.

• As such, they suggested Penn could enjoy a short-term share price boost as the launch garners attention, not least from the mainstream financial press.

Snowden vs third parties

Penn Entertainment’s Jay Snowden says the reliance on third-party platforms accounts for the Barstool Sportsbook failure.

It’s not me, it’s you: During a recent fireside chat with analysts from Bank of America as part of the bank’s recent gaming and leisure conference, CEO Snowden blamed the failure of the Barstool Sportsbook on the third-party nature of the product. Barstool could only do so much because the product was “not competitive,” a problem he pinned on the reliance of third-party providers.

• “There's a difference between having your own products and borrowing somebody else's,” he added.

• “When you're not in control of the product roadmap and the features and functionality, the UI, UX, then you're going to lose people because there's better products out there.”

• In comparison, he pointed out that ESPN Bet would be based on theScore technology from the off.

• “The level of customization on the marketing side is tremendous; the ability to move faster and control what that product roadmap looks like as those priorities shift.”

“We've been live in Ontario on this platform for over a year now and we've had great success on retention and market share sustainability both on the online sports betting and online casino side,” he added.

• He said it was the same on the iCasino side. “We really haven't had a good product in the US until two months ago.”

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Listing rights and wrongs

What happens when stock market enthusiasm sours?

Cold shoulder: When UK-listed gaming minnow Sportech finally gave up on a long but not necessarily fruitful listing status on London’s AIM, it was to no one’s great surprise. Formerly the owner of the UK’s Football Pools and latterly a play on land-based betting in Connecticut, its checkered history meant investor interest in the company was always on the frigid side.

• The company announced it was pulling the plug last week at the same time that it issued its H1 earnings.

• Having undertaken an evaluation of the benefits and drawbacks to a listing, the company said the “significant burdens” were simply too high for a company of its size.

• Rubbing salt in the wounds, the company’s share price has risen nearly 18% since the decision was announced.

Catch a wave: Despite the Connecticut connection, Sportech was never caught up in the mania for all things OSB and iCasino, which was prevalent in the US in the years following the repeal of PASPA.

• Helped in some cases by the concurrent rise of SPACs, the enthusiasm for the online opportunity in the US was a wave that many successfully caught.

• One such was Codere Online, which achieved a Nasdaq listing via a de-SPAC with DD3 Acquisition Corp II in December 2021 and raised $77m of PIPE investment.

Thinking fast and slow: Speaking to E+M’s sister publication LosIngresos+Mas last week, Codere Online CEO Aviv Sher said the company thought long and hard about going public. “We had an internal debate about whether or not it was best to go through an IPO on Nasdaq,” he said. 

• “At the time it was the vehicle that offered us the best valuation in the market,” he told I+M.

• “Codere (the parent) only gave up 33% control and in return we got $100m; the other options were much more expensive in terms of capital raise.”

The hidden costs: However, having entered listed life, Sher said being on Nasdaq is “very restrictive and very demanding”. Moreover, the benefits of having a public listing – notably when it comes to raising cash or issue debt – have been slow to materialize.

• “Basically, we're a good investment at a good valuation, but we're paying for it on a daily basis not in interest, but in extra operations and people that we need just to service the Nasdaq requirements,” he added.

• As to whether it was the right decision, Sher is somewhat non-committal. “This is what we have now,” he said.

• “Maybe we could have accepted a less lucrative offer and in return remained a private company and maybe less restricted.”

• “With our size and revenue, it is very difficult to be a Nasdaq-listed company, because the regulations and treatment that apply to us are almost the same that apply to Google.”

Weighing it up: Still, on balance, he believes the listing was the right approach. Partly, this is about transparency. “It’s a benefit that everything is public,” he argued, suggesting it gives its customers confidence that they are paying with a regulated company and their “money is safe”.

• Furthermore, “without the $100m, without these funds, we would not have been able to grow inorganically”.

• “You have to remember that when we raised the money in 2021, the markets valued growth and revenue growth over EBITDA and now it's the other way around,” he pointed out.

• “Now, having positive EBITDA is more important than growing revenue. This is the path we are on, and we believe it is the right one.”

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More takes

NFL promos: Promotional spend ahead of the new season was “slightly” up on 2022 but, crucially, this was driven by offers to new users, according to analysts at Wells Fargo. Laying out the offers, the team found DraftKings saw the “most significant decline” while rival FanDuel was up on last year.

• FanDuel was offering $200 in bonus bets across the majority of states vs a typical $150 in bonus bets in 2022.

• DraftKings, in comparison, was offering $200 in bonus bets vs a typical $1k deposit match last year.

• BetMGM made promotional offerings across states of either zero, $200 or $1,500 in bets vs $1,000-worth in 2022.

• Caesars offered the same promotion across the majority of states of $250 in bets vs $1,250 in 2022.

Flutter Entertainment: Looking at the UK-listed firm’s plans to seek a dual listing in the US by Q1 next year at the latest, the analysts at CBRE said it will likely improve the US profile for Flutter and FanDuel, enhance recruitment and retention of US talent and provide access to deeper capital markets and new investors.

• The team noted that a possible primary listing would “pave the way for improved valuation”.

Las Vegas prospects: The US appears to have evaded a recession, meaning it remains high times on the Strip, although analysts noted the “step down” in margins in Q2 for MGM Resorts. Looking at Wynn Resorts, though, the team at Deutsche Bank said they saw “stability at the high end” and that the “fundamental growth story remains intact”.

• Coming up in November is F1. The team at Macquarie titled their post-earnings Caesars Entertainment report ‘Chariot ready for F1 profits’, and the expectation across the major operators is that it will enjoy a very good Q4.

• CBRE’s analysts noted the “encouraging anecdotes” from MGM Resorts.

• Lorenzo Fertitta, vice-chair at Red Rock Resorts, made the point though that F1 and the Super Bowl next year were “just two data points that are going to be great” among others.

• “Las Vegas is unbelievable in the sense that it seems like there’s something major going on almost every weekend,” he told the analysts.

Calendar

• Sep 19-21: SBC Summit Barcelona

• Sep 28: XLMedia

• Oct 8: GeoComply Challenger event, Las Vegas

• Oct 9-12: G2E Las Vegas

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