Sports channel ESPN and gaming company Penn Entertainment have announced a multi-year, multi-million dollar deal to take advantage of the rapidly growing industry. It's a nut that other media companies have struggled to crack, but with the hulk Disney behind it, the deal could represent a new source of revenue for the company.

With the agreement of ESPN and Penn Entertainment, Disney officially enters the world of sports betting. The move has drawn some attention to what Disney has planned for the long term, especially after a mixed earnings pace, but it was big news for Penn stock.

ESPN has agreed to have gaming company Penn Entertainment use its brand for its online gaming business in a ten-year deal worth $2 billion. Penn Entertainment confirmed that it would rebrand its Barstool Sportsbook app as ESPN Bet, with Penn paying $1.5 billion over the decade for the rights. In addition, ESPN will also secure around $500 million in warrants to purchase shares in Penn.

Penn, who has struggled to find his way in the US sports betting space, predicts the deal will generate $500 million to $1 billion in annual profit over the long term.

The newly rebranded ESPN Bet app will be promoted on the broadcaster's streaming services and will have access to all of ESPN's talent. While ESPN had some existing ties to sportsbook companies Caesars and DraftKings, both deals are expected to be phased out in favor of the Penn deal.

ESPN President Jimmy Pitaro said of the deal: "Our primary focus is always serving sports fans and we know they want betting content and the ability to place bets with less friction from within our products."

At the same time, Penn also sold his Barstool Sports subsidiary to his founder, David Portnoy, in exchange for half the proceeds if he decides to sell the brand again. Penn originally bought Barstool Sports for $550 million, and the company is believed to have been resold for $600 million.

 Disney's mixed earnings

The ESPN-Penn deal accompanied Disney's tepid earnings report. Revenue for the fiscal third quarter was $22.3 billion, up 4% from a year ago, but missed Wall Street forecasts of $22.5 billion. On the upside, earnings per share came in at $1.03, beating consensus estimates of 97 cents per share. With disappointing performances for big movies and shows, Disney's media and entertainment distribution division earned $14 billion in the quarter, a 1% decline from a year earlier and missed estimates of $14.3 billion.

However, Disneyworld's business is booming. The Parks, Experiences and Products segment brought in $8.3 billion, which exceeded the forecast figure of $8.1 billion and represents an increase of 13% over last year.

The future of ESPN at Disney

ESPN, owned by media titan Disney, has valuable brand equity that any betting company would kill to get their hands on but, at the same time, is at odds with the familiar face of Disney. If Disney can bring ESPN into the direct-to-consumer fold, it could significantly help the company's pivot toward streaming.

There was specific mention of ESPN on the earnings call, where Disney CEO Bob Iger said it was "not a matter of if, but when" the sports-entertainment brand offered a direct-to-consumer streaming service. Iger also commented that total national sports advertising revenue is up 10% from last year.

Looking at Disney's existing direct-to-consumer business, such as Disney+, the segment posted $5.5 billion in revenue, an increase of 9% over last year. It came in slightly short of the $5.7 billion investors expected, but you can't smell near-double-digit growth. It's also a stark contrast to revenue from linear networks, which declined 7% to $6.7 billion.

In terms of new subscribers, Disney+ closed the quarter with 105.7 million subscribers, a 1% growth over the same quarter last year and a slight increase over the prior quarter figure of 104.9 million.

Disney has apparently "received notable interest from many entities" in a bid to onboard a strategic partner for ESPN and also wants to increase the amount of content the brand offers to transition to a full streaming service. The Penn Entertainment deal clearly helps with that, especially considering that the gaming industry brought in $7.5 billion last year.

With so much investment in the sports brand, Disney is unlikely to sell ESPN now, but never say never.

How did Wall Street take the news?

The news was a boon for Penn Entertainment's stock price, which soared nearly 20% following the announcement. It was resolved to close Wednesday's operations almost 10% more.

On the other hand, Disney suffered due to the pace of mixed earnings and shares ended the day down 0.7%. The stock has seen a 1.3% rise in premarket trading due to an anticipated anti-password sharing campaign by House of Mouse.

Other rival sports betting companies were not so lucky. DraftKings, which will not have a tie-in with ESPN in the future, closed down 10.8% on Wednesday. Caesars Entertainment's stock price fell nearly 2%, while MGM Resorts lost 0.5%. Despite a positive pace of earnings, Flutter's share price fell 3%.

The bottom line

The multi-billion dollar deal between ESPN and Penn Entertainment marks a significant shift in the sports betting landscape and Disney's strategic direction. The deal and Disney's plans to expand ESPN's content reflect a broader push toward new revenue streams and aligns with emerging market trends.

Wall Street's reaction underscores the deal's perceived potential to generate a significant portion of Disney's revenue. Or is he simply making ESPN a more attractive prospect before selling? Everything is at stake.