Barstool Deal ‘Credit Positive’ For Penn National, but Don’t Bank on Ratings Upgrade Anytime Soon

Posted on: February 3, 2020, 08:10h. 

Last updated on: February 3, 2020, 10:26h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Penn National Gaming (NASDAQ:PENN) said last week it’s paying $163 million in cash and stock to purchase a 36 percent stake in the entertainment and sports media property Barstool Sports, a deal the gaming company hopes will serves as a springboard into the potentially lucrative online sports wagering arena.

Penn National’s Barstool buy may be a good idea, but it won’t juice its credit rating. (Image: Daily Mail)

While some analysts are cautious on the acquisition, Penn stock jumped almost 15 percent on the week, soaring on Wednesday – the day the purchase was revealed – and Thursday, before giving back 3.37 percent on Friday.

Moody’s Investors Service called Penn’s purchase of the 36 percent interest in Bartsool “credit positive,” but cautioned investors against expecting a near-term upgrade to the gaming company’s rating or outlook.

The transaction is credit positive, but has no effect on Penn’s Ba3 corporate family rating and stable rating outlook,” said the ratings agency in a note obtained by Casino.org. “Despite its longer-term potential and significance, sports betting revenue has not been a significant revenue and earnings catalyst, since this product offering is relatively new, although expanding across the US.”

That’s a similar refrain to what some equity analysts are saying about the deal. Those with Penn in their coverage universe aren’t knocking the Barstool deal. However, some are encouraging investors to remember the US sports betting market is fragmented, in its formative stages, and that it could take years for operators to realize significant payoffs from big sports wagering footprints.

An Upgrade Would Have Been Nice

As noted above, Moody’s has a Ba3 rating and a “stable” outlook on corporate debt issued by Penn. That’s a junk grade, and one that comes with “speculative elements” and implies “substantial credit risk.”

Under the terms of the agreement, Penn can dole out another $50 million in three years to up its Barstool stake to 50 percent, and eventually take full control of the media entity. The operator’s capital expenditures vis a vis Barstool have prompted concerns about the company’s previously announced efforts to reduce balance sheet liabilities.

Some analysts say that the concern is relevant, but added that a sale of the Tropicana on the Strip remains in play and that would represent a significant delivering event for Penn.

By some estimates, parting with that property could result in $400 million to $500 million for Penn.

Patience Required

Due to the bifurcated nature of the domestic sports wagering market, and other factors – including tight margins and just 20 states having legalized – it’s reasonable to expect it’ll take some time for the Barstool deal to positively affect Penn’s bottom line.

“As a result, we do not believe that sports betting related revenue and earnings, in and of itself, will have a material enough positive effect on Penn credit metrics in the near term to have an immediate impact on the company’s rating and outlook,” said Moody’s.

Barstool is getting a 40-year exclusivity pact with Penn, and the former will promote the latter’s online and brick-and-mortar casinos on its web pages.