March 19, 2020 / 3:58 PM / 14 days ago

Breakingviews - Cox: Are taxpayers ready to rescue the jerks too?

ZURICH (Reuters Breakingviews) - Dave Portnoy has had a crappy week. The Barstool Sports founder, who calls himself “El Presidente,” was already coping with coronavirus shutting down the American athletic leagues that provide the grist his website relies upon for its daily fodder of irreverent videos and hilariously obnoxious social posts. Portnoy, who founded Barstool in his mom’s Boston-area basement 17 years ago, was also toiling with Tom Brady’s exit as quarterback for his beloved New England Patriots.

A man watches the game after betting at the FANDUEL sportsbook during the Super Bowl LIII in East Rutherford, New Jersey , U.S., February 3, 2019.

Yet none of that could compare to what was happening to Portnoy’s net worth. A month ago, he sold Barstool to casino operator Penn National Gaming. It looked like a home run at the time: Penn’s market value surged by $1.3 billion after agreeing to pay $163 million for 36% of Barstool on hopes its 66 million monthly unique visitors, or “stoolies,” would vault Penn into the online betting majors. Portnoy was so enamored of Penn he took a big slug of stock as consideration. The shares are now worth less than fifth of what they were then. “I’m down 30 mil,” Portnoy said on Wednesday’s “Barstool Rundown” show. “That ain’t no joke.”

Penn’s cratering is not El Presidente’s fault. From the Margaritaville Resort in Bossier City, Louisiana to the Greektown in Detroit, Penn shuttered all its gambling dens to thwart Covid-19’s spread and plans to pay most of its 25,000-plus “team members” until the end of March. The American Gaming Association, the industry’s trade body, urged elected leaders, in language suggesting it wants a bailout, “to support the workers and businesses who will bear the brunt of those effects.”

The reality of the economically existential coronavirus crisis is that casinos – who profit from impoverishing customers – will probably receive a government lifeline. So, too, will airlines, hotels, cruise operators and myriad other industries across the globe. It’s the right thing to do, goes the argument, because they employ millions of ordinary people. The pandemic is not a time for Old Testament justice. All of this may be true. But the world needs to confront a significant truth: taxpayers may also be bailing out the irresponsible, the reckless and, well, the jerks.

This is not a dig at Portnoy – even though he plays one on the internet. And his shtick is effective. Without Barstool, this writer would have given up on following professional American sports with any alacrity long ago. And his “One Bite” pizzeria reviews are fire. But his new masters at Penn offer what should be a Harvard Business School case study in how not to build a resilient company – one capable of weathering the ups and downs that are endemic to capitalism.

It starts with Penn’s balance sheet, a work of art designed for everything to go right. That’s why, with its casinos shut, shareholders have freaked out. At Wednesday’s close, Penn’s equity was worth $528 million – not much more than the $450 million at which it valued Barstool a month ago. And its liabilities? At the end of 2019, Penn had $6.6 billion of long-term debt including lease obligations, according to Refinitiv. In that respect, its stock is an option on solvency.

At the close of 2019, a year that will be remembered for its milk, honey and stock market boom, those borrowings meant that Penn paid $534 million of interest to its creditors. That compares to reported operating income of $572 million. Think about that. In one of the best years for the American economy in recent memory, Penn barely made more profit than it owed. Even a mild recession could easily have shifted the company into distress.

Investors didn’t think much about that until the virus came along. Perhaps they focused instead on Penn’s artisanal financial metrics, like adjusted earnings before tax, interest, depreciation, amortization and rent. Because, why focus on the cost of occupying a casino? Or maybe they fell for its definition of “traditional debt,” which it boasted it had cut by $70 million in the fourth quarter. Old fashioned or not, what ultimately matters most is a company’s ability to make interest payments with the money it has not spent on operations and compensation, including the $9 million that went to Chief Executive Timothy Wilmott in 2018. Jay Snowden took over as CEO in January.  

With American casinos almost certainly closed for months, not weeks, that’s going to be tough. Even when they do reopen, it’s hard to imagine betters who are now panicking about the transmission of deadly microbes clamoring to get their bare hands on the arms of Penn’s 51,000 slot machines. Moreover, a quarter of gambling customers are over 65, according to a 2010 Statista report, the cohort most susceptible to the scourge. Given the regional profile of its 40-odd facilities, Penn may have an even older customer base than the national average.

Add it all up, and it’s hard not to conclude that Penn’s managers and board built a company on shaky foundations, not “on underpromise and overdeliver,” as Snowden described it a few weeks ago in a joint CNBC interview with Portnoy and Barstool CEO Erika Nardini. But without a bailout, or a significant restructuring of debt that wipes shareholders out along the way, Penn will struggle to make it through the year.

For Portnoy, that’s probably a worse outcome than, say, Tom Brady’s move to the Tampa Bay Buccaneers. In the same CNBC interview, he described his ambitions for the Penn deal like so: “I am trying to get to ‘buy sports team type’ mogul.” It’s the sort of overconfident remark to expect from Portnoy, who established a successful business on sports-bro braggadocio. And thanks to a taxpayer rescue, it still might just happen.


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