An expensive mistake

US gaming giant Penn Entertainment took a risk when it began acquiring Barstool Sports in 2020. While the media firm showed a lot of promise in the US betting space, it also came with a significant amount of baggage. Mainly, that baggage centered around controversial founder and owner Dave Portnoy.

Regardless of the gamble inherent in such a move, Penn doubled down on its decision by completing its 100% buyout of Barstool shares just six months ago. The acquisition cost Penn an eye-watering $551m in total.

Portnoy bought back his company for “pennies on the dollar.”

It’s a risk that hasn’t paid off. Portnoy bought back his company for “pennies on the dollar” this month. In fact, he paid just 100 pennies, purchasing 100% of Barstool shares for just $1. The outspoken businessman confirmed the news in an “emergency press conference” on X earlier this month.

Upon completion of the Barstool buyout in February, Penn CEO Jay Snowden labeled the newly acquired asset a “proven, powerful media brand.” Here are the many reasons Penn took an incredibly costly loss on that brand just months later.

Courting controversy

Commenting in his press conference this month, Portnoy referenced the issues caused by New York Times and Business Insider hit pieces. He was alluding to two different stories that made claims about him over the past two years

shocking claims made by more than two dozen women

The Business Insider piece, titled “Young Women Say Sex With Barstool Sports’ Dave Portnoy Was Violent, Humiliating,” included shocking claims made by more than two dozen women. One such woman, named Madison, claimed she was left “literally screaming in pain” from Portnoy’s violent sexual behavior. Another alleged that she was left suicidal after having sex with the Barstool boss.

Demonstrating the impact of Portnoy’s jaded past, Penn stock tumbled 21% after the Insider report came out. It wiped some $2.5bn in market value from Penn, which owned just 36% of Barstool at the time.

Portnoy’s battle with the media didn’t end there though. The New York Times published a piece in November 2022 that questioned Penn’s decision to invest in “degenerate gambler” Portnoy. The article made several references to Portnoy’s “history of misogynistic and racist behavior,” including using the N-word repeatedly in past content – something that he has actually acknowledged.

The Barstool founder was quick to blast the NYT article as just another “hit piece,” but again it saw Penn stock drop 7%.

The business impact

Since the publication of the first Business Insider article in November 2021, Penn stock has fallen a staggering 68%. Overall Penn revenue, meanwhile, has been on the rise, albeit marginally. The operator beat profit estimates in H1 2023 in a revenue haul of $1.67bn, up just 3% year-on-year. That said, adjusted EBITDA dropped 31%.

Revenue from Barstool remains hindered by a lack of access in key markets. Again, this was undoubtedly tied to the company’s controversial founder. “We got denied licenses because of me,” the Barstool owner admitted on X, adding: “The regulated industry is probably not the best place for Barstool Sports and the type of content we make.”

The sportsbook also hasn’t proven particularly successful in its 16 active markets. Barstool is not in the top three most popular offerings in any of them. Although a popular media company with a young following, it seems Barstool has followed the path of other similar offerings such as FOX Bet, SI Sportsbook, and Yahoo! Sportsbook by failing to make much of an impact.

A rosier outlook?

With Barstool finally out of the picture, Penn has placed its faith in another well-known sports media brand. Disney-owned ESPN has decided to throw itself into the sports betting ring in a ten-year deal with Penn, requiring the latter to pay $2bn in cash over the course of the term:

ESPN Bet is expected to go live this fall and some analysts think it could prove a winner. Oklahoma State University Management Professor John Holden referred to ESPN as the “white whale” for gaming companies hoping to get into the betting space. “It was somewhat inevitable that at some point, ESPN was going to jump into this industry,” he said.

There’s a lot of upside for them if everything goes right”

While it all might be on the line for Penn with this second deal, Holden doesn’t see the agreement as much of a gamble for ESPN or Disney. Analysts generally agree that “the worldwide leader in sports” offers a more stable alternative to Barstool though. While the latter was founded by controversial Portnoy in 2003, ESPN has cemented its place as a staple brand in the global sports media space since its formation almost half a century ago.

That said, Joe Pompliano, a sports business analyst, deemed the ESPN deal a “hail mary” for Penn following its failed Barstool venture. He also claimed that ESPN has probably waited too long to enter the market, allowing betting juggernauts FanDuel and DraftKings a five-year head start to perfect their offering and claim the vast majority of market share.

With new market entries, such as Michael Rubin’s sports memorabilia juggernaut Fanatics, also making life difficult, it may be that ESPN could prove just as much a failure as its predecessor. Time will tell, but Penn undoubtedly needs to prove to investors that it can make a correct decision after what can only be deemed a disaster acquisition.