Penn Entertainment shareholder Donerail Group has expressed concerns regarding the company’s high spending on its interactive division and poor stock performance. In an open letter to David Handler, the board of directors chairman, Donerail also objected to Penn CEO Jay Snowden’s level of compensation amid the company’s financial struggles. The shareholder says Penn Entertainment should be sold to realize the value of its retail properties, offering shareholders billions more than the current valuation.
Donerail believes that Penn Interactive‘s strategy has failed, so the company’s shares have dropped over 80% in the past three years. Even worse, the stock is underperforming compared with its peer group, which includes companies like Boyd Gaming, Bally’s Corporation (Bally’s Corporation 17,16 -0,17%), DraftKings (DraftKings 35,11 -1,74%), MGM Resorts International (MGM Resorts International 35,01 -2,23%), and Flutter Entertainment. As a result, Penn’s market cap is about $2.2 billion, compared with its peer group’s $13.5 billion average.
Meanwhile, Penn’s retail casino business has been historically successful. According to Donerail, investing in regional properties is more stable regarding cash flow and profitability than in Las Vegas. These properties are also more resistant to economic slowdowns. However, the value of these assets is now overshadowed by the “failed” Penn Interactive strategy, leading to negative investor perceptions.
Donerail suggests selling Penn (Penn Entertainment 18,07 -4,09%) could generate significant value for shareholders. Even its conservative estimates show that a sale could generate between $5.9 billion and $6.9 billion, which is much higher than Penn’s current enterprise value of $4.1 billion.
CEO ‘Overcompensated’ as Penn Underperforms
Donerail points out that Penn’s strategy from 2000 to 2019 was to acquire retail casinos. In that timeframe, the company’s assets appreciated nearly 3,000%. However, after Handler became chairman in 2019 and Snowden became CEO in 2020, Penn changed its course. Instead of following a “true and tested” acquisition strategy, the company decided to “bet the house” and compete with market leaders FanDuel and DraftKings.
As a result, since Snowden’s appointment, Penn’s stock has declined 42.8%, while its peers, on average, gained 63.9%. Meanwhile, in the last three years, Penn’s stock is down even more, 82.9%. However, the shareholder points out that the underperformance hasn’t affected Snowden’s pay. Between 2020 and 2023, the CEO was paid $99.3 million, including more than $14 million in 2022, when Penn’s stock was down 40%.
Snowden’s pay hasn’t gone unnoticed. As You Sow, a leading shareholder advisory group, recently named Snowden the No.3 most-overpaid CEO in the S&P 500, with 77% of his compensation being “excess pay.” Meanwhile, Institutional Shareholder Services, another leading shareholder advisory firm, reported that Snowden’s alignment of CEO pay with company performance is -100, the worst possible score.
‘Failed’ Interactive Division Strategy
Donerail says Penn’s strategy shift from brick-and-mortar casinos to sports betting and online casinos has been unsuccessful.
After four years of effort, attention, and billions of dollars of shareholder capital invested, the Company has been unable to disintermediate the online sports betting landscape, as it had forecast. Moreover, 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.
In 2020, Penn acquired 36% of Barstool Sports for $163 million. After a year in which Donerail says it was clear the investment wouldn’t pay off, Penn decided to purchase the remainder of Barstool for an additional $388 million. In 2023, once it realized the partnership wouldn’t work, Penn cut ties with Barstool and sold it back to its founder, Dave Portnoy, for $1. According to Donerail, the pre-tax losses of the Barstool fiasco were close to $1 billion.
After Barstool, Penn partnered with sports media company ESPN to launch ESPN Bet. Snowden said the company will spend heavily on promos as part of the launch. As a result, he expects $300 million in EBITDA losses for the division in the next three years. However, Penn’s EBITDA losses in Q4 2023 alone were $338 million. Meanwhile, the company has updated its 2024 forecast to $500 million in EBITDA losses.
Donerail also points out the $2.1 billion overpayment to Canadian sports company theScore Media. At the time, the company generated only $25 million in annual revenue. With the acquisition, theScore’s founders, the Levy family, became part of Penn Interactive’s leadership. However, in early 2023, as part of a change in strategy, the Levys left Penn.
Donerail’s Letter Echoes Bally’s Investor’s Letter
While Donerail says the comparable peer group outperforms Penn, one faces similar criticism from a shareholder. A couple of months ago, K&F Growth Capital sent an open letter to Bally’s board of directors. Like Donerail and Penn, the shareholder slammed Bally’s for its “failed” interactive division strategy. It also called for selling the sports betting business while focusing on retail operations. Furthermore, K&F said Bally’s should reject an acquisition offer by another shareholder, Standard General. As a solution, K&F outlined a plan to turn things around.
Like Penn, according to K&F, Bally’s has made mistakes in its goal to grow its interactive division. That includes failed acquisitions, such as Gamesys and Bet.Works, worth $3 billion. K&F says Bally’s should eliminate past mistakes, improve operations, and focus on its retail verticals. If Bally’s follows these steps and the rest of the shareholder’s plan, it could bring shareholders double the value of Standard General’s $15-per-share offer.
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