Penn Credit Profile Weakening, ESPN Bet Problematic, Says Analyst

Posted on: March 5, 2025, 02:20h. 

Last updated on: March 5, 2025, 02:28h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.
  • Penn Entertainment credit profile weakening as rent leverage increases
  • ESPN Bet viewed as overhang

Penn Entertainment’s (NASDAQ: PENN) credit profile is being pinched by rising rent-adjusted leverage — a scenario expected to linger throught this year — and the operator’s ESPN Bet unit remains an overhang on its corporate debt prices.

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An image for Penn Entertainment. An analyst said the gaming company’s credit profile is weakening. (Image: Penn Entertainment)

That’s the take of Gimme Credit analyst Kim Noland who, in a new report, notes that sagging results from Penn’s regional casinos and ESPN Bet woes are dual headwinds for the operator’s credit outlook.

Last year, they posted disappointing numbers largely due to competitive openings in several markets,” observes Noland. “In addition, substantial capex for refurbishing and expansion weighed on free cash flow performance. Full year results were disappointing and showed a deterioration in the credit profile. High rent-adjusted leverage that exceeded the mid 7x range at year end likely will persist through much of 2025.”

The bulk of corporate bonds issued by gaming companies currently carry junk ratings, and that’s true of Penn debt. Noland has an “underperform” rating on Penn’s corporate debt maturing in 2029.

ESPN Bet a Drag, Could Be on Life Support

Noland’s report was published about a week after Penn released fourth-quarter and full-year results. On the company’s conference call with analysts, CEO Jay Snowden reminded investors that Penn and ESPN parent Walt Disney (NYSE: DIS) have an opt-out clause whereby either party can depart the ESPN Bet arrangement after three years. The third year arrives in 2026.

The chief executive officer stated the obvious: ESPN Bet isn’t where Penn hoped it would be. To date, it hasn’t mustered a credible challenge to DraftKings and FanDuel, and by some estimates, the sportsbook operator has just a 2.35% share of the US online sports betting market. That’s not nearly enough to justify Penn’s expenditures in the space.

That spending, now seen as a misstep by some market participants, has invited the scrutiny of activist investors. HG Vora, a major Penn shareholder, is pushing for three board seats in a likely proxy battle. Last year, the Donerail Group, another Penn investor, pushed the company to consider a sale. Both investors cite Penn’s misadventures in sports betting as among the reasons for their perspectives.

“Pennʼs strategic view of Interactive continues to rely on cross-selling to retail casino customers and mass market sports fans,” observes Noland. “This makes sense but the two main players in the market are unlikely to be unseated by Pennʼs ESPN Bet. Thus, earlier projections that ESPN Bet will achieve a big uptick in market share likely wonʼt be realized near term.”

Details on Penn Regional Casinos

Analysts and investors who have been critical of Penn’s sports betting efforts often note that business has been a distraction from the operator’s core regional casino business, and thus, a detractor to the stock price.

Penn’s fourth-quarter earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) improved, but that was on the back of some strength in the iGaming unit. Noland points out the operator’s EBITDAR was flat at its Midwest and Northeast regional casinos while that metric declined at Penn’s gaming venues in the South and the West.

On the bright side, Penn had $1.7 billion in available liquidity at the end of last year, is expected to generate $350 million in free cash flow this year, and doesn’t face any debt maturities until 2026.