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Analysts caution against Boyd’s reported Penn bid

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Barclays analysts and Deutsche Bank industry analysts have highlighted several challenges with Boyd’s possible bid for Penn Entertainment. These include Penn’s complicated ESPN Bet agreement with Disney, and that the market believes the product is undervalued.

Reuters reported on 21 June that Boyd Entertainment, a US casino operator, had presented Penn with a bid for acquiring the company that valued it at more than $9bn.

Deutsche Bank as well as Barclays believe that Penn will not accept a valuation like this. Barclays said Penn was unlikely to be “a willing seller” right now and that the deal could be difficult for Boyd.

Deutsche Bank stated in a Friday note that it did not believe the reported valuation was accurate. It estimated Penn’s trading price at about 5.1x the enterprise value of 2024 (market capital + traditional net debt plus EBITDA).

According to the note, the transaction could be very favorable for Boyd if valued correctly (between $25 and $30). Penn’s enterprise value is currently between $13.5bn to $13.6bn.

Boyd’s Penn bid could be derailed by certain issues

Both banks, however, see a number of issues which could derail acquisition discussions. Barclays, for example believes Penn is more confident in its digital strategies than what the market thinks.

Barclays said that it also expected Penn to be more confident in ESPN Bet’s ability to “gain ground” from this point, as opposed to what the current share price and market expectations suggest.

Donerail Group, an activist investor in May, urged Donerail to dispose of assets that would create “real and sure” value for its investors.

The hedge fund manager stated at the time: “While it is true that ESPN Bet may appear as the company’s latest bright and shining object, which may have significant value for the right owners. We ask the board to take a minute and reflect objectively upon the last four years of execution. Assess the shareholder capital destroyed. Recognize that shareholders might simply be tired from continued gambling on unpredictable outcomes.

Penn’s Interactive Revenue, which includes ESPN Bet, dropped 11.1%, to $207,7m, over Q1. Penn attributes this to the unfavourable holding of major sporting events during the quarter.

Deutsche Bank believes that the current market valuation for Penn Interactive’s B2C assets is likely to be low or even zero.

Disney’s Impact

Truist Securities stated on Monday (17th June) that it believed the market had undervalued Penn’s ESPN Bet because it provided Disney third-party access to the betting market.

Disney is not likely to seek direct entry into the gambling industry as an operator, or even a licence holder.

The ESPN/Penn relationship could be complicated by a Boyd acquisition.

Truist wrote in a letter that “we see ESPN Bet as the core of Disney’s direct-to consumer strategy for ESPN and we are encouraged by their comments about integrating both [ESPN Bet and ESPN]”.

It added that “An integrated gambling application appears to be strategic priority for Disney’s larger digital strategy.”

Penn has signed a licensing agreement with ESPN worth $1.5 billion last year. Penn will run ESPN Bet, while ESPN will promote the app on its broadcast and online platforms. Penn will have the rights to operate the ESPN Bet app for a period of 10 years. There is an option to extend the agreement for another decade.

Deutsche Bank asked: “In the case that a deal was agreed to which exceeded the strike price of the general warrants granted by ESPN Bet (12,7m shares for $26,08/12,8m shares for $29.99/7.3m at $32,60), what would be the treatment with a third party buyer?”

Penn Entertainment shares jumped on the news of Reuters yesterday, but they are now trading at $19.52 a share down by 2.57% in New York. Boyd shares are also up, with a 1.42% increase at $53.43 a share.

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