One of the most notable activist investor battles in gaming is at an odd kind of standstill.
As HG Vora attempts to exert greater influence over ESPN Bet owner Penn Entertainment, the hedge fund can claim a sort of victory, but it still doesn’t have what it has been fighting for.
HG Vora, upset at what it sees as a “complete failure” of a strategy in online sports betting, had pushed for three new directors to be added to Penn’s board.
Penn responded by nominating two of those directors, Johnny Hartnett and Carlos Ruisanchez, but shrinking its board from nine members to eight rather than nominating former CFO William Clifford.
That pushed the dispute to two new battlegrounds: Penn’s annual meeting, where HG Vora solicited votes for all three candidates while Penn claimed only two seats were up for election, and a federal court, as the hedge fund sued to allow votes for all three to be counted.
Last week, HG Vora seemed to declare victory in the first fight as votes from the annual meeting came in. It highlighted that Clifford “received a majority of votes cast in the election” despite Penn arguing that seating a third director was “out of order and not permitted.”
In a press release, Parag Vora, founder and portfolio manager of HG Vora, said, “PENN’s shareholders have voted overwhelmingly for genuine change, including for the election of William Clifford to the Board.
“There can be no mistake about the mandate from PENN’s shareholders that the status quo is simply unacceptable. We are grateful for the strong support the three independent nominees have each received from shareholders and are confident that Johnny and Carlos will work constructively with their fellow directors to drive shareholder value.”
So what’s next for Penn Entertainment and ESPN Bet?
Shareholder engagement
For Penn, a likely early priority will be dealing with the results of a different vote at Penn’s annual meeting: the “say-on-pay” proposal for executives, including CEO Jay Snowden.
An overwhelming majority — almost 65% — of votes rejected Penn’s executive pay packages. The vote is advisory, so Penn doesn’t have to cut Snowden’s pay from the $26.7 million he made in 2024. But public companies are expected to engage with shareholders and listen to their concerns when an advisory pay proposal faces serious opposition, never mind when it’s defeated.
After revealing vote totals from the meeting, Penn alluded to shareholder outreach, but its statement on the subject was not exactly a mea culpa.
“We look forward to further dialogue with our shareholders about our board’s composition and skillset evolution, as well as Penn’s executive compensation program and strategic priorities, to ensure alignment with our shareholders,” Penn said.
Penn representatives did not respond when asked for further information about pay-related shareholder engagement.
One subject HG Vora warned against is the idea that Penn could expand its board from eight seats back to nine, adding a new director without a shareholder vote. So far, Penn hasn’t taken any steps in this direction. If they are taken, the backlash would likely be significant.
Ultimately, whether Clifford is seated will depend on the decision of the U.S. District Court for the Eastern District of Pennsylvania.
With HG Vora wanting Clifford to be put on the board soon so he can have input on the decisions facing the company, a hearing to expedite the trial will take place July 10.
Of course, it’s hard to predict how a judge will view the case, whenever it happens. If Penn was based in Delaware, where large corporations usually choose to base themselves for tax and regulation reasons, there appears to be a stronger precedent for limiting a company’s ability to tinker with its board format. But under Pennsylvania corporate law, there are fewer cases where a similar situation has been challenged.
Even an expedited trial will not exactly be soon. The time frame HG Vora has proposed is November. If that request is granted and Clifford is added to the board, a lot could still change between now and his first meeting.
Double down or fold?
The biggest question to be addressed by then will be whether Penn doubles down on ESPN Bet or starts thinking about ending the $1.5 billion experiment, as HG Vora has called for.
Analysts at JP Morgan say there’s “no sugarcoating” the fact that ESPN Bet has “fallen short of expectations.” In their view, Penn should “start signaling intent to wind down the ESPN partnership over the next few months.”
If ESPN Bet does not hit its market share goals by 2026, the partnership between Penn and ESPN can be terminated. Analysts believe that the threshold needed to trigger a potential exit is in the 8-10% range, while Penn’s market share remains stuck well below the 5% mark.
With the NFL season looming, Penn will be thinking about whether to go ahead with one last big marketing push in the busiest betting months of the year in the hopes of creating the product that executives once believed ESPN Bet could become, or to avoid spending big to chase sunk costs.
