What happened

Shares of PENN Entertainment (PENN -1.92%) were moving higher today after the company surprised investors by announcing a new strategic alliance with ESPN, which is teaming up with the Disney (DIS -0.04%) sports media property on online sports betting in the U.S.

Additionally, Penn reported second-quarter earnings that were in line with estimates. As of 11:01 a.m. ET, the stock was up 12.8%.

So what

Penn said the two companies will launch ESPN Bet in the fall, rebranding the Barstool Sportsbook. As part of the deal, Penn is divesting its ownership of Barstool Sports back to Founder David Portnoy.

Penn, which owns dozens of casinos, including the Hollywood brand, will also have the exclusive right to the ESPN Bet trademark for online sports betting in the U.S. for a 10-year period and allow Penn to benefit from the use of ESPN programming, content, and talent to promote ESPN Bet. As part of the deal, Penn will make $1.5 billion in cash payments to ESPN over the 10-year period, and ESPN gets $500 million in warrants to purchase 31.8 million common shares.

The deal attaches Penn's online gaming business to the sports media leader. Penn CEO Jay Snowden said, "This transformative, exclusive agreement with ESPN marks another major milestone in PENN's evolution from a pure-play U.S. regional gaming operator to a North American entertainment leader."

Separately, the company also reported second-quarter earnings. Revenue in the quarter rose 2.9% to $1.67 billion, in line with estimates, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) was down 30.7% to $330.4 million as it continued to lose money in its interactive segment.

On the bottom line, a decline in other expenses led generally accepted accounting principles (GAAP) earnings per share to increase from $0.15 to $0.48, beating estimates at $0.42.

Now what

The ESPN tie-up looks like a smart move, but investors should remember that the online gambling market has struggled recently, and even a relationship with the world's largest sports media brand won't necessarily change that. Keep your eye on the launch this fall, as we should learn more when ESPN Bet comes out. For now, the declining operating profit shows the company still has work to do to put the business on the right track.