When news of ESPN and PENN Entertainment inking a partnership to launch an ESPN-branded sportsbook was revealed late Tuesday, it surprised consumers and investors. After all, many people had been yearning for ESPN to become more involved in sports gambling over the years, and the collaboration seemed to garner positive feedback. In fact, PENN Entertainment’s stock surged 26% after the 10-year deal was disseminated to the general public, energizing those bullish on the growth of the niche sector pervading most aspects of sports media. ESPN BET, as it is being called, is expected to be released in Q4 2023 during the month of November.

Both companies released detailed information about the future goals of their synergistic alliance and projections that lead them to believe it will yield as much as a 20% share of the total addressable domestic online sports betting market in the next four years. The presentation, filed with the United States Securities and Exchanges Commission, is based on a value proposition of leveraging the affinity and reach of ESPN to stimulate interest in betting. Additionally, Penn Entertainment brings market share, operating licenses and proprietary technology into the equation, which will combine with sports programming and personalities from the “Worldwide Leader.”

Penn Entertainment will match its $150 million annual payment to ESPN with equivalent marketing spend, meaning it will use $300 million annually to help grow the product. The company’s chief executive officer, Jay Snowden, foresees a return on investment, which equates to nearly $3.5 billion, occurring sometime in 2025.

“The key differentiation for us… is going to be the things that we can do around media integration, video and maybe potentially live streaming,” Snowden said. “There’s a lot of things that we can do because of who our partner is here that others won’t be able to.”

As it pertains to digital platforms, ESPN has 370 million social media followers and over 100 million digital unique users each month. While The Walt Disney Company will hold its quarterly earnings call Wednesday afternoon where it should provide updated subscriber metrics, ESPN+ has more than 25 million subscribers. The streaming platform increased its average monthly revenue per subscriber last quarter amid a 7% decrease in linear network revenue.

ESPN’s integrated media outlets will promote the sportsbook in its mission to attract consistent users as an impetus for growth. Whether it is through its betting programs, digital products or sponsorships, the network will disseminate this content to its subscriber base. It all will reportedly lead up to the launch of a direct-to-consumer product, which is currently in development under the project name “Flagship.”

PENN Entertainment will also cross-sell to iCasino, which will include a separate product within its mobile application branded in that way. The company currently estimates that it holds a 10% market share in the United States, and it will oversee the daily operations of the sportsbook as it aims to grow. The PENN Play database enables the venture to generate more retention and consolidated types of play.

PENN Entertainment has the exclusive right to use the “ESPN BET” trademark across its digital channels in the United States, and it will receive media marketing services from ESPN as well. The casino operator is paying $1.5 billion over the 10-year term with the right to extend the contract for another decade upon mutual agreement.

Another part of the deal comes in ESPN’s commitment to promote responsible gambling practices by developing its own committee on these and other related matters. On top of that, ESPN is granted the right to designate an observer to attend the Board discussions regarding PENN Interactive. Three years into the agreement, ESPN can appoint its own member to the board or integrate a non-voting observer at any time.

The adjusted EBITDA potential with a retail cross-sell upside is between $500 million and $1 billion, a substantial valuation following Flutter Entertainment and FOX Corporation’s decision to shutter FOX Bet’s operations. Furthermore, performance in the deal is incentivized based on stock warrants, which ESPN currently has $500 million worth committed.

The “Worldwide Leader” can earn up to 6.4 million additional shares, which, according to its current share, are worth an estimated $159 million. EBITDA potential for the deal would increase to approximately $1.5 billion should the agreement garner its performance warrants, which require a tranche of 25% or more of the market share at a strike price of $28.95. The strike price is calculated based on the weighted-average exercise price of general warrant shares. These shares accrue value in a ratable vesting scheme over the 10-year period as part of the long-term warrant structure.