Significant shareholder Donerail sent a letter to the Penn board of directors and board chair David Handler. In the letter, Donerail urged the company to sell assets to generate “meaningful and certain” value creation for investors.
Donerail stated its belief that Penn’s casino assets alone are valued at over double the company’s current market capitalisation.
The hedge fund manager noted heavy criticism of Penn from the investment community over its capital allocation strategy. It highlighted that Penn’s shares are down over 80% over the last three years.
Donerail said: “The growing pattern of guidance misses, alongside a demonstrated unyielding appetite to continue to invest in the company’s fledgling interactive projects, irrespective of past results and without a clear return framework, has significantly damaged the credibility of this management team and board of directors.”
Donerail is urging Penn to consider the sale of Penn’s assets, especially with other companies looking to grow through M&A.
“Our research over the last few months has left us with resounding confidence that the crown jewel of the company – Penn’s 43 gaming properties spread across 20 states – not only remains intact but has a stronger foundation than ever and continues to be highly valuable,” Donerail declared.
Interactive strategy “destroyed” shareholder value
In 2023, Penn divested Barstool Sports, selling the sportsbook back to its founder Dave Portnoy for $1 before launching ESPN Bet in November. This followed regulatory pushback, with Portnoy himself stating Barstool wasn’t a good fit with the gambling industry with concerns over his reputation.
“We underestimated just how tough it is for myself and Barstool to operate in a regulated world,” Portnoy explained, according to ProFootballTalk. “Every time we did something, it was one step forward, two steps back. We got denied [gambling] licenses because of me. So the regulated industry, probably not the best place for Barstool Sports and the type of content we make. It’s back to the pirate ship.”
In urging Penn to sell, Donerail was critical of the company’s ability to execute its interactive strategy. It stated the implied value of its estimated $4bn (£3.1bn/€3.7bn) investment into the sector was meaningfully negative.
Penn’s interactive revenue, which includes ESPN Bet, fell 11.1% to $207.7m over Q1. Penn attributed this to unfavourable hold on the major sporting events over the quarter. The company’s entire revenue decreased 3.8% to $1.61bn in the first quarter.
Donerail added: “While we understand that ESPN Bet appears as the company’s newest bright and shiny object that may very well have significant value under the right owners, we ask that the board take a moment to reflect objectively on the past four years of execution, assess the shareholder capital that has been destroyed, and recognise that shareholders may simply be tired of continued gambling on uncertain outcomes.”
Donerail questioned whether such loss of credibility could be rectified. The group called for an “immediate strategic shift” to prevent Penn’s equity price and shareholder returns stalling further.
Snowden criticised
Donerail criticised Jay Snowden, appointed Penn CEO in January 2020, for failed online gaming investments such as Barstool.
Donerail also highlighted the $99.3m in compensation Penn’s board had approved for Snowden between 2020 and 2023.
In 2022, when Penn’s stock fell by over 40%, Snowden received more than $14m. In the past, Donerail’s fellow investors such as BlackRock and Vanguard have voted against Penn’s executive compensation.
“Perhaps most concerning, Mr. Snowden appears to have little confidence in his own strategy or ability to lead Penn to success, given the fact that he has consistently sold stock and is, in fact, responsible for the most stock sales by any Penn executive since being named CEO,” Donerail continued.
“Since he was named CEO, Mr. Snowden has sold more than 750,000 shares, for proceeds of approximately $45 million, with several of his sales coming on the heels of the company’s deals and his own seemingly optimistic comments.”
Truist: Penn would survive without ESPN Bet
Despite Penn’s struggles, a Truist Securities report in April concluded the company would operate as normal even if ESPN Bet was to fail.
Penn’s interactive division would keep the company afloat should ESPN Bet stall, according to the report. Truist also stated Penn was well-placed to capitalise on ESPN Bet’s success despite the fact it’s still in the early stages of its existence.
“What we think the market is missing is that Penn Interactive is comprised of multiple businesses beyond just ESPN Bet,” Truist analysts wrote. “In the event that ESPN Bet falls through, then we think interactive would still have value for Penn.”