Penn Entertainment’s (NASDAQ: PENN) ESPN Bet division may face divestiture next year if the online sportsbook fails to gain traction before the conclusion of 2026. 

In August 2023, Walt Disney (NYSE: DIS), the parent of ESPN, and the regional casino operator signed a $2 billion deal for 10 years, which included a clause allowing either party to exit after the third year. Penn CEO Jay Snowden noted the anniversary during the company’s fourth-quarter earnings conference call last week.

"But if for whatever reason we’re not hitting the levels that we need to, then obviously as you’re approaching that third anniversary, you have a three-year clause in the contract that both sides will have to do what’s in their best interests,” said Snowden in response to a question from Deutsche Bank analyst Carlo Santarelli. “And so, that’s always out there.”

Penn’s deal with ESPN led to significant losses for the company on its purchase of Barstool Sports, which it returned to founder David Portnoy for only $1. The sports broadcaster terminated deals with Caesars Entertainment (NASDAQ: CZR) and DraftKings (NASDAQ: DKNG) to collaborate with Penn. 

ESPN Bet Aiming for ‘Podium’ Standing 

When ESPN Bet was launched almost two years ago, Penn aimed for it to compete with industry giants DraftKings and FanDuel for a position in the top echelons of the US sports betting market — an achievement it could not realize with Barstool Sportsbook. 

“When we announced our partnership with ESPN in the summer of ’23, both sides of this partnership made it very clear that we expected to compete for a seat at the podium,” said Snowden on the call. “And we’re not on pace right now to do that.”

Applying the podium metaphor, the gold and silver medals shift between DraftKings and Flutter Entertainment’s (NYSE: FLUT) FanDuel, both of which hold substantial advantages over bronze medalist BetMGM. Caesars Sportsbook might pursue the third position, but DraftKings and FanDuel are significantly ahead of all other competitors. 

According to various estimates, ESPN Bet possesses only a 2.35% share of the US online sports wagering market — significantly below its declared target of 20% by 2027. Snowden pointed out the successful launches of Penn’s updated iGaming platform in Michigan and Pennsylvania, stating that the operator has “great ambitions for 2025 and 2026” for ESPN Bet. 

Certain investors would be pleased to witness the demise of ESPN Bet. 

The future of ESPN Bet is uncertain, but it's clear that certain Penn investors would prefer the gaming operator to exit the online sports betting industry permanently. 

Hedge fund HG Vora is preparing for a proxy fight with Penn, advocating for three board positions and focusing on the operator's errors in sports betting. This reflects the views of the Donerail Group, another shareholder of Penn, which stated in a letter to Penn’s board last May that the company is underperforming in the sports betting sector. 

Certain investors and analysts contend that sports betting has been a burden on Penn shares, leading market participants to disregard the worth in the operator's main regional casino operations. The conference call did not include any comments regarding the proxy battle or the participation of activist investors.