• Penn Entertainment announced it is terminating its relationship with ESPN following disappointing performance.
• DraftKings will step into the role previously occupied by Penn.
• The ESPN Bet app is expected to stay alive, supported by DraftKings odds and technology.

Following news that Penn Entertainment (NASDAQ: PENN) is ending its partnership with ESPN effective Dec. 1, it is confirmed that DraftKings (NASDAQ: DKNG) is poised to fill the void created by the regional casino operator’s departure from the ESPN Bet partnership.

The ESPN Bet logo. DraftKings is replacing Penn Entertainment as the gaming company behind the betting app. (Image: ESPN Bet)

Penn made the announcement earlier today in conjunction with its third-quarter earnings report. Rumors subsequently surfaced that DraftKings will take Penn’s spot in the ESPN Bet relationship, but financial terms haven’t been revealed. DraftKings delivers third-quarter results after the close of US markets today and it’s possible that report will include details on the  partnership with ESPN.

We view this transaction as a positive for DKNG, given the large top of funnel that the ESPN ecosystem provides,” said Jefferies analyst David Katz in a note to clients. “We expect with the benefit of DKNG’s operating capabilities, the market share of ESPNBet could be meaningfully larger. Early reports are that ESPNBet Live will continue to air, which will likely feature some DKNG branding as well.”

Katz added ESPN Bet branding will remain alive and the mobile application will be powered by DraftKings odds.

DraftKings Could Pay Pretty Penny for ESPN Deal

It’s not yet clear what the economics of a DraftKings/ESPN relationship will be, but Penn shelled out significant capital, perhaps overpaying in the eyes of some analysts and investors, to gain access to the sports network’s brand.

“PENN will pay ESPN $38.1 million in Q4 with respect to all remaining fees owed, and will pay an additional $5 million to ESPN following the termination date for traditional media to support theScore Bet and/or Hollywood iCasino,” notes Truist Securities analyst Barry Jonas. “ESPN will retain vested warrants to purchase ~8 million shares at a weighted strike price of $28.95 with all unvested warrants and performance warrants forfeited by ESPN. PENN’s noncash expense related to the vested warrants is expected to be around ~$14 million in Q4.”

It’s possible that owing to its own strong branding and position as one of the top online sportsbook operators in the US, DraftKings won’t need to entice ESPN as heavily as Penn did and that might be to the relief of DraftKings investors as the company is already using its slumping stock to finance other deals.

Penn Parting Gifts

Penn will refocus its North American online sports betting operations under theScore brand, for which it paid $2 billion in August 2021 to gain a footprint in Canada. The casino operator is expected to use that transition to up the focus on its growing iGaming unit, leveraging sports betting to move customers to its internet casino platform.

theScore doesn’t have brand recognition comparable to ESPN. No company in sports media does, but Penn isn’t walking away empty-handed.

“Notably, theScore has approximately 4 million monthly active users across North America, and PENN will retain a database of 2.9 million digital users acquired during the ESPN relationship (including 300,000 acquired this football season,” adds Jonas. “Further, PENN noted its iCasino business achieved its highest quarterly gaming revenue to date in Q3, driven by record cross-sell from online sports betting and growth from standalone apps.”

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