Memo: The Public / Private Linear Play

They did what? I was sitting in the office with a small group of investors when the news crossed the wire: The Chernin Group completed a deal to sell a majority of Barstool Sports to Penn Gaming. The room was astonished. Chernin had taken an ill-advised chance in betting on the controversial media company in a 2016 deal that turned out to be one of the smartest private market media deals in recent history. The irony of the moment was that no one in traditional venture capital would have risked their limited partners’ capital on Dave Portnoy and his band of characters. But quietly, many investors wished they had. The Penn deal didn’t make sense to many in that room. Why so early?

A 2017 essay by investor, media personality, and author Anthony Pompliano opened with the assessment that “Barstool Sports is building the most valuable media company in the world.” Pompliano, who spent time assessing the startup’s role in sports media, concluded the essay with the following:

I just hope that [Portnoy] doesn’t get scared and sell the company too early because he can’t handle true greatness. [1]

It remains to be seen whether or not Chernin Group’s sale of Barstool, coming three years after this essay, was too early. But the result was one of the most fascinating turnarounds of a legacy retailer in recent history, and the data suggests that Chernin may have pioneered a strategy that others will soon follow. Just seven months prior, Chernin invested in niche media company MeatEater, Inc. This deal enabled CEO Kevin Sloan to accelerate his company’s linear commerce strategy. The press release made it simple: The deal marks a major milestone in MeatEater’s plans to expand from content to commerce and builds on the longstanding relationship between MeatEater founder Steven Rinella and the First Lite team.

Over the summer, The Chernin Group poured $50 million of additional capital into the franchise, of which it’s a majority stakeholder. That money was used, in part, to make MeatEater’s first acquisition. The company acquired First Lite over the summer, a technical apparel brand that it has partnered with for years. [2]

But the Penn Gaming deal is different. It’s a public deal, one where value could be quantifiable in ways that you don’t find in private markets.

The Public / Private Linear Play

The Chernin Group has mastered linear commerce. If you’ve built a great product, you will need an organic and impassioned audience. And for companies that possess a captive audience, they’ll need products and services to support them. The digital economy rewards the companies that operate along the line that separates media and commerce.

Led by media giant Peter Chernin and Jesse Jacobs, The Chernin Group (TCG) has never been a traditional private equity firm. According to Portnoy, TCG was the only offer in 2016. Scouted by firm executive Mike Kerns, TCG helped to evolve Barstool from a simple cash flow positive operation among friends to a sophisticated operation led by former Yahoo Vice President and AOL Chief Marketer Erika Nardini.

Technically, TCG did sell Barstool early. But not too early. Given the company’s suitor, it didn’t seem that the Los Angeles-based investors seemed worried about the hasty timing. What they may have recognized is that Barstool’s value would create a wealth that even Penn Gaming couldn’t have predicted. With upside remaining (TCG still owns a stake in Barstool) and newly acquired stock in Penn Gaming – a publicly traded casino holding company – TCG created a unicorn asset out of a sports blog.

In finalizing this deal, TCG established a blueprint for a public/private linear commerce maneuver that we will see more of. Meanwhile, Penn’s stronger competitors are pursuing traditional partnerships to accomplish the same. This week, MGM announced a deal with actor, comedian, and musician Jamie Foxx in what traditional industrialists cited as a savvy move for the larger casino and hotel operator.

On Tuesday, BetMGM announced that Foxx agreed to star in their new advertising campaign, centered upon the invented claim that it’s the King of Sportsbooks. Possibly adopting from Budweiser’s “King of Beers” or maybe borrowing from their lion symbol meaning king of the jungle. Whatever the case, having Jamie Foxx on board will certainly get people’s attention and command respect.[3]

The BetMGM sportsbook is reflective of the shift towards gambling legalization, democratized for the internet commerce age by digital innovators like DraftKings and FanDuel. Many disagree with MGM’s insistence that Foxx’s impact will accomplish for the joint venture of MGM Resorts and GVC Holdings what Barstool accomplished for Penn Gaming.

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I have bad news for BetMGM: Betters don’t care what Jamie Foxx things about sports gambling.They care what @stoolpresidente has to say. They care what @PatMcAfeeShow has to say. This will go down as an absolutely incredible waste of money.

Unlike MGM Resorts (which grossed $12.9 billion in 2019), you’ve likely never heard of Penn Gaming or a number of its institutions. With over 18,700 employees and a footprint across the Midwest and South, Penn Gaming owns and operates five raceways and casinos. In 2019, revenue exceeded $5.1 billion with an operating income of $500 million. The acquisition of Barstool Sports is at least partly responsible for taking the company’s market capitalization from a 1x multiple of top line revenue to a 2.5x multiple during one of the most unfortunate periods for sports in recent history. Penn Gaming revenue for the quarter ending on June 30 was $306 million, a 76.91% YoY decline. With the pandemic shutting down college and professional sports seasons, it was Barstool’s content factory that propped up the stock of a company starved for operational income from legalized vices.

At nearly 55 years old, Penn Gaming acquired a loyal audience and a digital-first future that will position it against the likes of DraftKings, FanDuel, and initiatives by William Hill, Fox Bet, BetRivers, PointsBet, and the aforementioned BetMGM. With the launch of Barstool Sportsbook in Pennsylvania, early signs pointed to its potential. The app led all others in sports betting downloads. Bank of America’s Shaun Kelley noted:

Our initial impressions are positive given the app’s ease of use and leverage of the Barstool brand to create a unique interactive experience. We think the app targets more of a casual bettor than competitors.

And this is where the value of Penn Gaming’s bet on Barstool Sports (and The Chernin Group’s bet on Penn Gaming) come into focus. As the legalization of sports betting continues to convert casual fans into gamblers, it will happen on a channel that Barstool is exceedingly better at than Penn Gaming’s competitors: the internet. But this $6.6 billion value add is more than a strategy for the gambling industry or sports as a whole.

The public/private linear play is the acquisition of an audience for a commerce-based company or the acquisition of a product for an audience-based company. We will see more of it as the Barstool Sports acquisition has proven that non-adjacent, private market acquisitions can have significant market moving power. The linear commerce strategy is not reserved for direct to consumer brands or influencer content. Even the oldest institutions can employ the strategy against their larger competitors. Penn Gaming has proven that. And in doing so, they’ve successfully hedged for a future that may become more digital than their industry is ready for.

Report by Web Smith | Editor: Hilary Milnes | Art: Alex Remy | About 2PM

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