• Penn’s shareholder unease.

• Entain concludes strategic review, puts Crystalbet up for sale.

• Hard Rock denies Star link, threatens legal action.

• In +More takes: AGS buyout questioned, the Games Global retreat.

Maybe I shouldn’t try to be perfect.

Penn’s shareholder pressure 

You are not serious people: Before Earnings+More’s revelations over the corporate jet usage at Penn, shareholder pressure was already building as activists circle and the company faces questions about its online strategy and its levels of executive compensation.

Earnings before the nasty stuff: As noted yesterday, the Penn proxy statement for 2024 showed that CEO Jay Snowden received a short-term incentive plan (STIP) bonus of $4.37m in 2023 on top of his salary of $1.8m. CFO Felicia Hendrix received a $825k STIP payout on top of her $850k salary.

• But to achieve these bonuses, the company agreed to exclude the losses at ESPN Bet from the calculation of adj. EBITDAR, which determined the bonus levels for the executive team.

Everything but the whirl: The company said the compensation committee calculated the adj. EBITDAR applicable by excluding the losses in the online arm for the second half of 2023, which is the period after Penn first agreed the ESPN deal with Disney.

• It said that doing so “accurately reflected” management’s strong performance in 2023, “distinct from the unanticipated change in interactive strategy.”

• By thus adjusting the numbers, it meant the STIP went from 78.1% of target to 99.1%.

Artifice: To even things up a bit the committee also adjusted the shares-based long-term incentive plan, so as to also exclude the “artificial inflation” caused by the “successful” ESPN Bet launch. This meant lowering the LTIP achievement from 141% to 108%, and the executive team saw their equity awards drop by 33%.

• Still, it meant Snowden received an LTIP award of $11.1m, consisting of 50% in shares and a further 50% in share options.

• Hendrix, meanwhile, received $2.98m in LTIP awards, with $1.49m in shares and a further $1.49m in share options.

The heart of the matter: It is the (under)performance of ESPN Bet that lies at the center of the controversy over the bonus levels. In its launch quarter of Q4 last year, the operation racked up an adj, EBITDA loss of $334m, more than double what had been expected by the analysts.

• It followed that up in Q1 with further adj. EBITDA losses of $196m. The company also upped its expected interactive adj. EBITDA losses for 2024 by $100m to $500m at midpoint. 

It’s temperamental, my fiasco: All this came after what David Einhorn from Greenlight Capital said, in a letter to his investors, was the “fiasco” with ESPN Bet precursor, Barstool Sportsbook, which he said had left investors with “serious doubts about the company’s strategy and management’s competence to execute.”

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A mountain of losses

Your right leg, I like: The doubts over capability don’t run to the bricks & mortar gaming side where, despite recent worries over regional casinos, investors are generally happy with how the business has performed. 

• Einhorn pointed out in his letter that, based on an 8-12x multiple of free cash flow, the land-based casinos business should be valued at between $4.3bn and $7bn vs. the current enterprise value of $4.3bn. 

Dead set on destruction: But as one investment source who spoke to E+M on condition of anonymity said, where Penn has “gone awry in a meaningful way” is the $4bn it has now spent – or squandered depending on your viewpoint – on various interactive initiatives. 

• This includes the $2bn spent buying theScore, the $551m spent on Barstool – subsequently sold back to Dave Portney for $1 – and now the $1.5bn 10-year commitment on ESPN Bet.

• “There appears to be no accountability on the failed M&A and, on the back of that, the shareholder value they have destroyed,” said the source.

Penn Entertainment and its discontents: Alongside Einhorn’s Greenlight, HG Vora has a 9% share and has gone public with its desire for boardroom representation. Then there is a more recent activist name added to the register in Shapiro Capital Management. None of the activist investors wished to speak to E+M regarding Penn.

The widening gyre 

Weak become zeroes: Situations such as the one Penn finds itself in tend to attract speculation and, in this instance, there have been murmurs of interested parties circling. “People perceive Penn as being vulnerable,” said the financial markets source. “There is interest in either splitting the business up or siphoning off the B&M side.”

• “It’s unlikely the online side gets shut down, but they might look at separating the two.”

• “The irony is that if Penn simply stuck to selling market access deals across the 20 states in which it operates, it would have a profitable online business.”

Disney matter: Then there is the position of Disney. The appointment of CTO Aaron LaBerge, who joins from ESPN itself and who will have responsibility for ESPN Bet, might placate fears over the direction of travel, although it should be noted he doesn’t have any experience in online betting and gaming.

• “Disney did its part in using the ESPN name to get people to sign up,” said another investor source. “But Penn failed with the retention.” 

• Another source suggested the litmus test will come in September with the start of the NFL. “There is an incredible focus at Disney on this,” they added. “This really kicks in in September.”

• Still, the willingness of Disney to believe in Penn’s capability remains an issue.

The arrow was pure gold, but somehow missed the target: Notably, a recent note from Bank of America suggested ESPN Bet had missed its initial market share targets, meaning revenue was too low while the fixed-cost base was too high. 

• The company claimed the revenue shortfall was due to weaker than expected spending, which the analysts said was due to a “weak product mix.”

• But the cost base was what worried the BofA team. “Put simply, ESPN Bet’s $1bn cost base appears meaningfully too large for its current revenue,” they suggested.

• “Without a big acceleration (and soon), it looks hard to scale to profitability, leading to ‘higher-for-longer’ losses that we think place significant risk on Q4 and 2025 estimates.”

Having moved the stock to a Hold, despite the recent share price lows, the BofA team said they believed ESPN Bet’s high cost structure “increases both the time to scale and execution risk, despite lowered guidance.”

• Penn is now “more of a deep value turnaround than a growth opportunity,” they added.

• “Meanwhile, balance sheet deterioration could take years to recover from and limits strategic flexibility.”

The vote: To be clear, there is zero chance of the company losing the non-binding vote on its executive compensation given the weight of institutional share ownership. But sources suggested that should the rebels achieve even a 10% or less vote against, or any substantial withholding of votes, then that would be “sending a message.”

• “A company that is doing well should get 98% in favor,” they added. “If you are not getting well over 90% it is a clear message that shareholders are unhappy.”

• Said another source: “Every single vote against will help. The company doesn’t want engagement with shareholders, and it gives the impression it doesn’t care.”

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+More news

Entain concludes review

As you were: The strategic review undertaken by Entain’s capital allocation committee has concluded the company has the “appropriate portfolio of diversified strategic assets, brands, capabilities and geographic footprint.”

• All except you: That is except Crystalbet in Georgia, which the committee has concluded is “non-core.”

• “As such, strategic alternatives for this business will be considered, including interest already received from potential acquirers,” it added.

The company said today that there “remains significant upside” if it could focus on delivery, the return to an organic growth path and “winning” in the US. It added that its balance sheet and leverage position is “robust.” 

• Notably, the company recently extended its revolving cash facility and repriced its $1.74bn  and €1.03bn term loans and added a further ~£600m capability split across both.

All paths lead to Romer: Operationally, the committee expressed confidence in Entain’s progress on a number of fronts, including in Brazil, the US and with Entain CEE and the ongoing Project Romer cost-saving program. The company said the committee will continue to review strategy on a periodic basis.

Barnacles off the boat: Jefferies analysts said they saw “limited change” resulting from the review but noted that, although not mentioned in the statement, the review conclusion “may now catalyze the pending CEO appointment.”

Hard Rock denies Star link

That’ll be a no then: Hard Rock has quickly moved to scotch rumors put about by Australia’s stricken casino operator Star Entertainment that the Florida-based company had made approaches about buying the company.

• In a press release, Hard Rock said it wanted to “make it clear” it was not involved in “nor has it authorized any discussions, activities or negotiations on its behalf in connection with a proposed bid for Star.” 

• “Hard Rock International has similarly not authorized the use of the Hard Rock brand in connection with any proposed bid for Star by any third party.”

• It added it was investigating the matter and would “pursue all necessary legal actions to protect our brand and reputation.”

For whom the Bell tolls: Recall, Star is currently the subject of a public enquiry in Australia into the company’s suitability as a casino license holder in New South Wales after a 2022 probe found it had committed multiple AML infractions.

+More takes

Activist laments AGS buyout: Last week, investor Emmett Investment Management went public with its fears that the $1.1bn offer from private equity house Brightstar offers shareholders little or no premium and has allowed for little investor understanding of the company’s “exceptional” recent trading performance.

• Brightstar announced the $12.50-a-share all-cash offer earlier this month.

Flutter: Winning on product was a key theme among the analysts, with CBRE suggesting it was a “key theme globally.” “Regardless of jurisdiction, management attributes much of its recent performance to an array of product and content innovations,” the team said.

Games Global retreat

Joel Simkins, newly installed as founder and CEO at XST Capital, took to LinkedIn to offer a view of the pulling of the Games Global IPO. Recall, the online gaming supplier pulled its New York listing less than a month after announcing the move, saying it was “in the best interest of shareholders.” 

Regrets, I’ve had a few: Simkins, who spoke at the Earnings+More Capital Markets Forum event in New York in early May, noted he had said on the day that the now-canceled IPO “was set to be a significant indicator” for the industry. “Regrettably, this IPO has been shelved due to ‘market conditions’,” he added.

• He pointed out that, although interest in the sector remained “strong”, the stocks often attract short-term focused hedge funds. 

• But, he added, while gaming stocks “aren’t essential for most long-only funds, savvy, long-term investors do exist and can become staunch supporters of new market entrants.”

Cancel culture: On the Games Global no-go, he said the cancellation “doesn’t reflect a lack of interest” in either gaming or its online variant. “While establishing a market comparable would have been ideal, there’s still significant demand for online gaming services in both established and emerging markets,” he said.

IPOs aren’t easy: The Games Global float would have seen the selling shareholder maintain a controlling stake in the business, and Simkins noted this can “complicate matters”, particularly if initial floats are small. 

• “A robust initial offering that assures liquidity and broad market coverage can mitigate risks associated with concentrated ownership.

I’ll be back: He added that he expected Games Global to return to the market “when conditions improve, leveraging its strong cash flow and market position to explore options like strategic sales, partnerships with private equity or a reattempt at an IPO.” 

Calendar

• May 21: Better Collective (earnings)

• May 22: Better Collective (call)

• Jun 6: Gaming in Holland

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