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DraftKings falls 10% on new threat for sports gambling market share from ESPN-Penn partnership

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One of the leading sports gambling stocks fell sharply on Wednesday after media giant ESPN took a large step into the online betting world.

Shares of DraftKings were down 10% in midday trading after Penn Entertainment announced that it had signed a 10-year deal with ESPN. Penn will rebrand its sportsbook — currently named after Barstool — to ESPN Bet.

ESPN, which is part of Disney, had previously been reluctant to fully embrace the highly competitive online gambling industry. However, ESPN is shedding cable subscribers, and Disney CEO Bob Iger told CNBC in July that the company was open to strategic partnerships with the sports media brand.

As part of the deal, Penn will pay ESPN $2 billion in cash and stock warrants over 10 years to license the brand. Shares of Penn rose 8% on Wednesday.

The move could signal an end to a non-exclusive marketing deal that ESPN has with DraftKings. Disney also has an equity stake in DraftKings.

"It is possible ESPN could have required DraftKings to drop its own brand in favor of ESPN branding, which would have clearly presented its own hurdles. The PENN/ESPN partnership also raises the question of whether Disney will hold onto its less than 5% stake in DraftKings or look to unwind its position," MoffettNathanson analyst Robert Fishman said in a note to clients Wednesday.

"Big picture, we will see if this is the first step for Disney to reposition ESPN through new partnerships and even a potential new strategic equity partner that might help ESPN with distribution and content as well as capital to de-risk the asset for the company," Fishman added.

Disney's fiscal third-quarter earnings report is due out on Wednesday after the market close. The media giant's stock was down less than 1% ahead of the report.

— CNBC's Michael Bloom contributed reporting.

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