When $500 million.
Now that the deal has been terminated, the terms of that arrangement look dramatically different. As part of the severance, Penn agreed to give ESPN one last $38.1 million payment, likely bringing the total cash paid to about $380 million.
It also updated ESPN’s Penn equity warrants. Under the original deal, ESPN was given warrants to buy 31.8 million Penn shares as part of three tranches with three separate strike prices—$26.08, $29.99 and $32.60—vesting in even installments over the 10-year period. It would have cost $921.3 million for ESPN to eventually exercise all those options.
Following this week’s separation agreement, ESPN will keep only what vests by next February, which covers exactly a quarter of those options. That’s 7.96 million shares, which would cost ESPN $230.3 million to fully execute.
Equity warrants are valued in various ways—the Black-Scholes model being one of the most common—so it’s unclear exactly what math ESPN used to price the original options at $500 million. Those same calculations on the remaining vested options, however, would almost certainly produce a number significantly lower than 25% of that original $500 million.
For starters, Penn’s stock price has fallen. Penn shares opened at $24.65 on the day the deal was announced back in 2023. They’re currently trading at $15.59. The stock hasn’t closed above the lowest of ESPN’s three strike prices—$26.08—in more than 23 months. The lower stock price means Penn stock would need to appreciate dramatically before ESPN would consider executing any of its options.
What’s more, the warrants all expire from February 2023-February 2025. Given that ESPN is also now closer to the expiration date, that will also bring down the expected value of the warrants.
It’s include stock options. They’re a way to build in added upside for both parties—the partner makes more if the company’s value jumps, and the company is now also worth more.
It’s also not uncommon for those warrants to go unclaimed. In the about $30 million worth of options expire while executing on some others.
The original agreement between ESPN and Penn also included bonus warrants, up to 6.4 million additional shares, if ESPN Bet hit specific performance benchmarks. Those warrants were not earned and the options were terminated as part of Thursday’s separation agreement.
