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Shares in Penn Entertainment surged by nearly 20% on Friday (31 May) after the Donerail Group highlighted “significant strategic failures” and called for the sale of the company.

In an open letter sent to the Penn board of directors and board chair David Handler, Donerail Group managing director William Wyatt argued that Penn’s “misguided interactive strategy” and poor capital allocation have destroyed shareholder value.

Wyatt emphasised the need for a strategic shift and suggested that a sale of Penn’s assets could unlock value for shareholders.

He also pointed to a series of unsuccessful online gaming deals, particularly the Barstool Sports debacle.

Penn acquired Barstool Sports in 2020. However, Penn eventually sold it back to founder Dave Portnoy for $1, amounting to a pre-tax loss of almost $1bn, according a filing by the company.

Wyatt also stated that after “pivoting its attention to ESPN Bet, there has been no improvement in the [Penn’s] ability to execute in interactive.”

CEO pay and stock performance

Furthermore, Wyatt criticised the “excessive compensation” amounting to nearly $100m for CEO Jay Snowden, despite what he described as “extremely poor performance.”

He contended that since Snowden took the role of CEO more than four years ago, Penn’s stock has dropped by over 40%, whereas its peers, on average, have seen gains exceeding 60%.

The S&P 400 Index also surged by more than 50% during the same period.

“Penn’s relative performance over the last one-year, two-year, and three-year periods is similarly discouraging; in fact, it is rare that we have ever seen such a sustained and underwhelming underperformance under the same CEO without intervention from a company’s board of directors.

“Today, Penn’s stock trades at the lowest level since early 2017, excluding a four-week period at the onset of COVID,” he stated.

In response to Penn’s Q1 2024 performance, Penn CEO Jay Snowden argued the results were driven by bad circumstance. Snowden also pointed out that green shoots of recovery could be seen in the numbers.

“ESPN Bet continued to attract new users this quarter while maintaining a disciplined approach to promotions and marketing expenses; however, our financial results were impacted by lower-than-expected hold and spend per user.

“We believe our enhanced product offering and media integrations will result in superior experiences for our customers, leading to higher retention, share of wallet, and spend per user,” said Snowden.

Assessing Penn’s market value

Wyatt argued Penn’s stock price is “significantly below the intrinsic value of the company,” and that its casino assets alone could be worth more than double the firm’s current market capitalisation of $2.2bn.

He believed that the company’s regional casino properties, accumulated over 40 years, remain highly valuable assets, yet they are currently overshadowed by the failures of the interactive strategy.

Wyatt stated that Penn’s properties could potentially fetch 6.0x to 8.0x EBITDA in a sale, which he considered conservative compared to the ~10.6x pro forma presynergy multiple that Penn paid to acquire Pinnacle in 2018.

“Even using conservative transaction multiples of between 6.0x and 7.0x EBITDA for PENN’s casino properties, fair value would be between $5.9bn and $6.9bn in a sale transaction. This compares against the company’s current enterprise value of $4.1bn,” Wyatt wrote.

Wyatt added that “although ESPN Bet appears as the company’s newest bright and shiny object” and may hold significant value under the right owners, he urged the board to “reflect objectively” on the past four years of execution and “recognise that shareholders may simply be tired of continued gambling on uncertain outcomes.”

“Absent an immediate strategic shift, we believe that the company’s equity price will continue to stall, and shareholder returns will stay muted,” the Donerail Group managing director added.

However, Wyatt noted that given “industry participants’ current strategic appetite to grow inorganically, we do believe that a sale of the company’s assets, if undertaken, could generate meaningful and certain value creation for equity investors.”

Image Credit: William Wyatt (LinkedIn)

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