Penn National Gaming (NASDAQ:PENN), the regional casino company, bought a 36% stake in closely held Barstool Sports for $163 million on Jan. 29 -- $135 million in cash and $28 million in nonvoting convertible preferred stock -- valuing Barstool at $450 million.
Barstool agreed that Penn will be its exclusive gaming partner in all sports-betting products. Additionally, the Barstool brand may be used in all Penn casinos, and Penn may launch Barstool sports bars or restaurants.
The Chernin Group, owners of 60% of Barstool Sports, will own a lesser stake of 36% after the deal closes, the companies said. Barstool employees will own the rest.
The deal also includes plans for Penn to invest another $62 million in Barstool after three years, which will boost its stake in Barstool to about 50%.
Barstool Sports: "For the common man, by the common man"
Barstool Sports is oftentimes considered a brash, crude, and controversial media brand, producing blog posts, podcasts, social media, and live events aimed at mostly millennial sports fans. The company has been building a coveted database of gamblers through the Barstool Bets app, established in September 2019.
Using an omnichannel approach, Barstool brings 66 million unique visitors a month. The company delivers exposure to 48% male and 44% female millennials and Generation Xers, 62% of whom bet on sports.
Penn National CEO Jay Snowden said, "With its leading digital content, well-known brand, and deep roots in sports betting, Barstool Sports is the ideal partner for Penn National and will enable us to attract a new, younger demographic, which will nicely complement our existing customer database."
Snowden added, "We were missing what Barstool had, but wanted to figure out how we could be big players in sports betting. And Barstool was missing what we had, which is a physical presence, and licenses across the U.S. -- basically the infrastructure and operations experience."
Barstool Sports brings growth to Penn National Gaming
Penn National is confident the acquisition will generate positive results almost immediately. Barstool's annual revenue has grown 65% year-over-year to $100 million, according to Penn's presentation explaining the transaction. Besides revenue growth, Penn anticipates that customer acquisition costs will drop as it leverages Barstool's omnichannel resources.
Penn National and Barstool Sports expect their deal to close in the first quarter of 2020 and that it will benefit investors almost immediately. Investors took note, as Penn National stock rose almost 11% on the news.
What this mean for investors
The sports betting industry has been exploding since 2018, when the Supreme Court legalized sports gambling nationwide, with individual states responsible for setting their own terms and practices. States are slowly approving sports betting in different forms -- sometimes online only, sometimes in-person gambling, sometimes a hybrid approach. Fewer than half of states have approved some version, but proposals are being considered in the majority of states at this time.
Penn is reporting 2019 earnings on Feb. 6, and Wall Street expects it to post quarterly earnings of $0.37 per share, which represents a year-over-year change of 200%. Revenues are expected to be $1.35 billion, up 16.5% from the year-ago quarter.
Over the last four quarters, the company has beaten consensus EPS estimates twice.
The casino operator sports a relatively high P/E at 38, but the Barstool deal changes everything, in my opinion. The combination covers nearly all demographic and media bases, and will pose a formidable challenge to competitors in the gambling sector. The chances of disappointment if you invest in this stock are low, especially if you can pick up some shares on general market weakness or a temporary dip after earnings.