Donerail Urges Sale of Penn Entertainment Amidst Financial Missteps in Online Sports Betting

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Close on a week has passed since the Donerail Group, a high-profile investor in Penn Entertainment (NASDAQ: PENN), penned a harsh letter to the gaming company’s leadership. They urged the board of directors to consider selling after a string of financially hurtful blunders in the realm of online sports betting. So far, Penn management seems undeterred by the investor’s fiery missive.

Meetings with sell-side analysts indicated that Penn executives are staunch in their will to continue along the path laid by ESPN Bet. The strategy doesn’t seem out of place, seeing as the betting firm had just rolled out this mobile sports betting application in the previous November. Hitting back at Donerail’s critique of the considerable amount of capital the regional casino operator has injected into sports betting, these expensive undertakings involved a whopping $1.5 billion being paid to ESPN over the span of a decade for access to its brand, along with an additional $500 million in equity warrants.

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“In the meetings, management was somewhat constrained in their response to the letter due to understandably held back rebuttals. Nonetheless, it seems that PENN remains dedicated to substantiating the ESPN Bet proposition at least until the 2024/2025 football season when they anticipate their betting product would have achieved equal standing with enhanced ESPN partnerships”, shared Stifel analyst Steven Wiecyzinski in a communication.

The analyst, who rates Penn with a “hold” and a modest $19 price target, highlighted that while the Donerail letter successfully instigated a short squeeze on the stock, it is most likely ineffectual in luring in fresh investors to the shares at the current moment.

The bulk of Donerail’s reproach of Penn, echoed by other investors, is rooted in the belief that the company’s much-hyped ventures and missteps in online gaming operations have overshadowed the allure of Penn’s strategically positioned collection of land-based regional casinos. To be precise, numerous investors have begun to view Penn more as a digital gaming venture, rather than acknowledging the fact that the firm is the largest regional casino operator and it is these land-based venues that form the significant part of its revenue and earnings. Up-to-date data indicates that, in most states, ESPN Bet currently holds fifth place in terms of market share.

Penn remains unswerving and seems to be homing in on first-rate acquisition from the ESPN database and has reiterated their firm stance on making improvements to the ESPN Bet product, as well as integrating more with the ESPN ecosystem. Leadership at Penn believes these undertakings will ultimately expand its wallet share,” noted JPMorgan analyst Joseph Greff.

The analyst recently met with Penn Entertainment’s top executives, including CEO Jay Snowden, CFO Felicia Hendrix, and Treasurer Mike Nieves. Greff indicated that their response to Donerail’s letter, which contained a fair bit of criticism of Snowden’s remuneration, was markedly muted.

Naturally, Penn’s decision-makers are not in the habit of downplaying their endeavors, including ESPN Bet. Penn executives seem cautiously optimistic that with the online betting segment functional throughout the entirety of the 2024 football season, the likelihood of gaining some market share is high.

Moreover, Penn management appears enthusiastic about welcoming former Walt Disney (NYSE: DIS) executive Aaron LaBerge on board as Chief Technology Officer (CTO). Greff concluded, “He will likely bring an experienced team with him, while increased integrations with ESPN properties are expected to enhance the user experience and stimulate engagement.”