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Could Flutter join a potential takeover bid for PENN Entertainment?

Posted on by darion

As PENN Entertainment considers making a takeover offer from Boyd Gaming Corp., a recent report suggests Flutter could enter the fray.

According to a report from July 5 ShareFlutter is “evaluating” certain assets of PENN Entertainment, a gaming company that owns more than three dozen casinos nationwide. Flutter’s potential power play to acquire ESPN betting could be the latest revolution in a rapidly changing domestic market Sports Betting market. Less than seven years since the historic PASPA decision, the market has already undergone dramatic changes as many mid-sized sportsbooks have closed. Large-scale industry consolidation has created a market that is overwhelmingly controlled by a handful of major operators.

Last month, PENN shares surged following reports that Boyd he approached the company about a potential takeover bid. Boyd’s PENN takeover bid is fraught with complications, given that the latter is smaller. When the news broke last month, PENN was trading at about $20 a share, valuing it at about $9 billion — significantly higher than Boyd’s $7.8 billion at the time. In addition to his retail properties, Boyd owns a 5% stake in FanDuel Group.

Flutter, FanDuel’s parent company, moved its primary offering to the New York Stock Exchange this spring. Despite the move, Flutter remains listed overseas on the London Stock Exchange.

Tripartite agreement

As is the case in almost every industry, Tripartite agreements are usually very complicatedIn 2021, rumors surfaced that MGM Resorts, DraftKingsand Entain could consider one regarding the future MGM Plant. At the time, DraftKings made a $22 billion cash and stock offer for Entain, which nearly doubled the offer MGM Resorts made months earlier. Ultimately, the deal never came close to materializing, as DraftKings withdrew the offer.

Based on simple logic, a merger becomes exponentially more difficult to pull off when additional parties come to the negotiating table. Complicating matters even more is the fact that multiple other parties would have to sign off on the deal, Deutsche Bank analyst Carlo Santarelli wrote in a July research note. That includes Gaming and Leisure Properties, Inc., the real estate investment trust that owns PENN retail casinos. Given the future of ESPN BET, the deal would require Disney’s approval. From a financing perspective, the potential deal would involve a significant number of capital market participants. Finally, the multibillion-dollar deal could raise antitrust concerns, potentially requiring approval from the Federal Trade Commission.

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On the management side, however, the companies know each other well. In April, PENN named former Disney Entertainment technology chief Aaron LaBerge to head the company’s online division. Last week, Flutter made two additions to its board of directors, including the appointment of former Disney executive Christine McCarthy. At one point, McCarthy served as Disney’s chief financial officer. Boyd, meanwhile, recently appointed former Barclays banker Michael Hartmeier to his board, fueling speculation that the company could be pursuing an M&A deal.

The M&A rumors have picked up steam in recent weeks after activist investor Donerail Group sent a letter to PENN shareholders urging a sale of the company. The investor criticized PENN for perceived wasteful spending on its digital side.

ESPN BET valuation

Last August, PENN and ESPN announced a breakthrough deal which led to the launch of ESPN BET. Given the network’s widely recognized brand, the deal marked the first time a major chain had lent its name to a new sportsbook in the U.S. Wayne Kimmel, a prominent venture capitalist at Seventy-Six Capital, believes the operator could eventually vault to the top of the market.

But since ESPN BET hasn’t celebrated its first birthday yet, valuing the operator as a standalone asset could be difficult. Remember, ESPN BET launched in November last year around the middle of the NFL season. By September, the operator will be available for the first time during the first week of the season. For ESPN BET, the return of football will provide a huge opportunity to acquire customers. Barry Jonas, an analyst at Truist Securities, sees this period as an opportunity for ESPN BET to capitalize on key product milestones.

In April, ESPN BET was estimated to have a national market share of about 6%. That’s in line with Barclays’ forecasts from last year, just before its launch. At the time, Barclays was forecasting a 6.1% OSB market share in the fourth quarter of 2023, up from 2.8% the previous quarter, per Barstool Sportsbook. In the second half of this year, Barclays’ models predict ESPN BET will reach a national market share of about 7%. That’s well below PENN Entertainment CEO Jay Snowden’s expectations of more than 20% by the end of 2027.

Under the deal, PENN will pay ESPN $1.5 billion over 10 years, plus an option to acquire $500 million in warrants. The deal includes an opt-out after three years. Given the high cost of acquiring customers, PENN noted in May that its interactive segment will face an adjusted EBITDA loss of $475 million to $525 million in 2024. As for Flutter, questions remain about whether the company will pay a significant amount to attract a competitor. Flutter’s balance sheet is ideally positioned if the company decides to pursue new M&A opportunities, JMP Securities analyst Jordan Bender wrote in a research note Tuesday.

PENN traded at $19.70 Tuesday, down 1.8%. PENN opened the year at around $26 a share but has rebounded from 2024 lows of $14 last month. Flutter posted fractional gains Tuesday, trading at $198 a share, while Boyd rose to $54.75.