Disney Continues To Gamble On Sports As Overall Business Continues To Seek Identity

Summary:

• Disney has entered a $2 billion deal with Penn Entertainment to license its ESPN brand for their sports-gambling app – raising questions about how gambling fits into the company’s portfolio.
• However, the deal is meaningful as it continues to cement the company’s position in sports content, which is vastly different from last year when it was seen as an albatross.
• While initially Disney’s CEO Bob Iger was against leaning into gambling, his mindset has begun to change and Disney overall has begun expanding into more adult content to remain competitive.
• Disney’s deals to acquire 20th Century Fox and the majority of Hulu are prime examples as both give them the ability to play in two remarkably different content lanes.
• Investors need to be aware of this venture along with questions around ESPN’s distribution model and the future of Disney’s linear networks may lead to a period of volatility.

So Mickey, Minnie, Donald and Daisy walk into a casino…

While that may seem like the setup to a joke, it is actually now closer to a new reality for Disney (NYSE:DIS) and it is very telling about the state of its business.

This week the House of Mouse announced a deal with Penn Entertainment to license its ESPN brand for their sports-gambling app in a $2 billion deal. It marks the first entry into online betting for Disney and it has sent analysts into a spiral trying to make sense of it all.

For now – all it really means is an influx of cash that Disney has made no secret it needs.

Although we have to ask, what are the long-term effects and how will this impact Disney’s squeaky-clean image?

First as always, some background.

Penn Entertainment is no stranger to online gaming, it runs the Score in Canada and had recently run the Barstool Sports betting app. Although that has proven challenging to say the least. Penn thought with Barstool it was getting a young buzzy brand to utilize as the face of its gambling aspirations – what they got was a headache.

Barstool founder Dave Portnoy has a reputation from shooting from the hip and cultivating an anything- goes environment.

That type of relationship was never going to work.

Penn thought by buying half of Barstool it would get a seat at the table that it could use to reign in Portnoy and bring some order to the chaos.

Again, that was never going to happen.

Barstool was as advertised – a young buzzy brand – but what Penn overlooked is they are such a brand because they have no problem courting controversy. For a heavily regulated industry like sports betting, the idea is to call LESS attention to yourself than more when it comes to anything but the actual act of betting.

Penn ultimately decided it needed to separate itself from Barstool and go to a much safer but still well-known brand – enter ESPN.

In fact, Penn was so desperate to find a new partner, it made a deal with Portnoy that was heavily skewed in his favor. For the amazingly low price of $1, Portnoy would again be sole owner of Barstool, but in return Penn could collect up to half the profits from any future sale of the site.

Granted it’s one-sided because Portnoy’s been clear the Penn deal was not a high point in his career and he has very publicly said he has no plans to EVER sell any part of his company again.

So now Portnoy and Barstool exit the fold and Penn is left with Mickey Mouse and Bob Iger. For them, those are the ideal partners as Disney is about as far on the other side of the firebrand scale from Portnoy as possible.

Under the terms Penn will pay $1.5 billion in cash and grant ESPN access to buy around $500 million worth of shares in the company. The deal runs for ten years with a mutual option to renew for another ten years afterwards.

For Disney, this is meaningful as it continues to cement the company’s position in the world of sports. It is a stark difference from last year when analysts had convinced themselves Disney should cut ties with ESPN as they viewed it as an albatross.

And yet now Disney has made ESPN into one of its big three pillars and may be looking at cutting ties with its other television networks.

Now you would think that a family friendly brand, Disney would not want to associate itself with the much more adult world of online betting… and if this was 2019 you would be right. Iger was very anti-gambling during his first run at Disney, but his successor Bob Chapek was a lot more welcoming. While Chapek is gone, his mentality on the subject has seemingly stayed.

And honestly as odd of a relationship as it sounds, it does make sense.

Yes, Disney is known as a family-friendly brand, but it has over the years made investments in more adult partners specifically to expand that reach. The 20^th Century Fox deal is a great example as Disney has long wanted to put out awards caliber films like Bohemian Rhapsody but couldn’t under its current brands.

Now though with 20^th Century under the Disney umbrella it gives Disney a new pathway that is not associated with them in the same way a Buena Vista or Disney Studios tag would be. Hulu is another example – Dopesick and The Handmaid’s Tale would never be able to live on Disney+ in its current form, but on a separate site like Hulu the projects could thrive (and have).

Remember Disney also did a deal to acquire 5% stake in DraftKings the other year but nothing every really came of it – largely because the terms were diluted pre-sale. It was very much a “dipping our toes in the water” scenario that never played out.

Of course, with the Penn deal it was expected that Disney may divest from DraftKings – which has now happened – leading to DraftKings shares decreasing and Penn shares increasing, as you’d expect.

Investors can’t get wrapped up anymore in what’s considered on brand for “Disney” and what’s not because the bar has changed. Disney as a company can’t survive just playing to kids and families it needs that adult audience to compete with others.

As we saw with the earnings this week, the reaction seems to be that Iger’s building the track as he’s driving the train… which has traditionally not worked well for their rivals.

This, along with his comments on ESPN’s changing distribution model, potential streaming password crackdowns and the future of its linear networks is going to create a very unstable model for the studio in the next year.

However, Disney’s earnings may not have been amazing, but they did show signs of stopping some of the bleeding that plagued the company in recent months.

Disney’s recent decision to extend Iger’s term as CEO is also at least a sign the company is committed to whatever vision he intends to put forward. In that way they do achieve some bad needed stability. Iger is still a respected name who has the track record Disney needs right now.

Yes he’s had a rocky stretch lately and made some comments he likely regrets, but he’s also been honest that what he inherited was not what he left behind and it will take some time to fix.

This is clearly now the House Of Iger, but unfortunately for investors it looks like it will be under renovation for quite some time. While that is something shareholders may not like hearing, it’s the truth and as we’ve seen with other streamers, time really can help solve some of these tougher issues.

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