Earnings+More - Poisoned Penn
Poisoned PennThe potential for a sale of Penn assessed, online faces up to increased taxes, Raketech’s earnout misery +More
I wanna love you, but I better not touch. Poisoned PennSmall pool: Only a handful of companies would be willing to throw their hats into the ring to buy Penn Entertainment following the open letter from activist shareholder Donerail calling for a sale of the business.
Two against the field: This chimes with comments from investment insiders spoken to by Earnings+More. As per yesterday’s edition, one source who opted for anonymity suggested there were, in fact, only two likely bidders. Let’s hear it for the Boyd: The first is Boyd Gaming. The regional operator would be likely to be interested in buying what the Donerail letter described as Penn’s “less flashier” casino assets.
Sale or return: The issue for a sale to Boyd, however, would be what to do with ESPN Bet. As it stands, Boyd has shown limited interest in operating OSB and instead has a long-standing and deep market access arrangement with Flutter, through which it owns a 5% stake in FanDuel.
Hard choice: The other potential buyer is Hard Rock. It would also be enticed by the regional casino assets, and with the buyout of the Mirage – which will become the Hard Rock Las Vegas when it reopens in three-years’ time – it would be able to clearly operate a hub-and-spoke model similar to that of Caesars and MGM Resorts.
Getting value: The pricing of any deal would of course be key. The Donerail letter put the case for why the Penn Entertainment regionals business was undervalued by the market currently. It pointed out that even using conservative transaction multiples of between 6x and 7x, it would mean the fair value for the B&M business was in the range of $5.9bn-$6.9bn.
Sportsbook platforms don’t go live every day, and certainly not ones as sophisticated as this… Sounds interesting? Find out more here: www.metricgaming.com Caustic commentaryAnger is an energy: The letter from Donerail managing partner William Wyatt reserves most of its scorn for Penn’s handling of its interactive operations in the past three years or more. In particular, it tears into the company’s recent online acquisitions. Barstool: Wyatt said the thesis behind the tie-up with Dave Portnoy’s social media group was “fundamentally flawed.”
theScore: Wyatt also didn’t mince his words on this acquisition, pointing out that Penn laid out $2.1bn for a “small” Canada-based sports media company with less than $25m of annual revenue.
Naïve: “Had a digitally native and more experienced leadership been at the helm, shareholders have to wonder if this could have been done in a more cost-effective manner from the onset,” the letter continued.
A dead lossThen there is ESPN Bet. Wyatt picked up on the recent evidence that ESPN Bet is undershooting expectations, saying this proves there has been “no improvement” in Penn’s ability to execute online. Premium drinks not included: He pointed out that Penn said previously the estimated cumulative net interactive investment – inclusive of both operating losses and capital expenditures – was expected to be between $200m and $400m over a three-year period.
No guiding light: Indeed, in Q4 alone Penn reported an adj. EBITDA loss of $334m for the online business. It also issued guidance for a further adj. EBITDA loss of $400m in 2024. “This guidance was followed by a further guidance revision lower to an estimated $500m loss, at the midpoint of the provided range, just earlier this month,” said Wyatt. In total, Donerail estimates that Penn has invested $4bn of shareholder capital in its online adventures since 2020 and with precious little to show for it.
+MoreChannel switch: FanDuel is nearing a naming rights deal with regional sport network provider Diamond Sports, replacing Bally’s as the lead name on 18 regional pay-TV networks, according to a report from Bloomberg.
Stake’s stake: The founders of Stake.com, Ed Craven and Bijan Tehrani, have upped their stake in PointsBet to over 5%, according to a filing with the Australian Stock Exchange. The pair have been adding to their position via Stake parent Easygo Entertainment since early March. Tax and spendLeveling up: In the debate over the new graduated tax rates in Illinois, the team at JMP noted the apparent discrepancy between OSB and iCasino tax rates and those applicable for B&M gaming.
The right blend: They noted the blended sports-betting tax rate for the US has increased from 15% to 20% prior to New York to ~20% over the course of the last several years.
Additionally, they added that the vast majority of online sports-betting states are subject to a flat tax, while half of the states that host B&M casinos and online sports betting have “some form of graduated tax rate for casino revenue.”
“Intuition would tell us lower gaming taxes for brick-and-mortar casinos would be more beneficial in the eyes of politicians given the ability for casino operators to invest more money into people and properties at a physical casino,” JMP added.
Smoke signals: JMP pointed out it has been “well telegraphed” that the business models of the operators would “adjust to the higher tax rate playbook” in Illinois, similarly to what they have done in New York.
Adjustment bureau: Similar thoughts came from the team at Jefferies, who recently spent some time with DraftKings’ management. “Our impression is that there are ways to mitigate tax impacts, such as adjusting promotional strategies and marketing levels, revisiting market access strategies,” the team suggested.
Read across: In today’s Compliance+More, fears over further states looking to either tax increases or changes to the promo deductions rules are dominating the conversation. IDComply simplifies managing KYC requirements across multiple jurisdictions, while prioritizing the player experience. With just one integration, operators can leverage multiple data sources and pass more players. Built for gaming, and optimized for player experience. Book a demo to learn more. Over and earnoutHow not to do an earnout: The news that Raketech has agreed a €5m revolving credit facility with the Bank of Valletta in Malta might be related to disclosures in its recent Q1 earnings announcement regarding the earnout due on its Casumba acquisition, completed back in 2019. A great deal: The original terms of the deal look innocuous enough. Raketech bought the business for a mere €2m in upfront cash, which represented a multiple of only three times the trailing EBITDA for the 12 months before the acquisition.
That might have been a mistake: The signs that the Casumba earnout was becoming something of an issue first emerged ahead of the earnings announcement when the company published a press release saying the board was withdrawing the previous commitment announced at the May AGM to pay a dividend this year.
Pay the piper: In the announcement, the reason for this caution became clear. In Q1 Raketech fulfilled the latest part of the earnout, paying the former founders €13m. But this is a mere downpayment. In fact, Raketech told investors the total remaining on the earnout was €34m.
Safety first: CFO Måns Svalborn reassured investors that Raketech had the money to pay the founders. “Given our current cash flow estimate for the year, our free cash flow is well above upcoming estimated earnout settlements,” he said on the call. So maybe the new credit facility is just a precaution. How’s your luck? All the more galling, perhaps, is that just at the point that Raketech can hope to benefit from all of the revenue from Casumba, the operation’s largely Japan-facing assets got hit by a recent Google core update.
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