Sinclair Shares Spike +35% with Acquisition of Fox RSNs

JohnWallStreet

The Walt Disney Company (DIS) has accepted Sinclair Broadcast Group’s (SBGI) $10.6 billion bid for the 21 Fox regional sports networks (not named YES Network) and Fox College Sports. Sinclair (the largest operator of local TV stations in the country) plans to acquire the cable assets “via a newly formed indirect wholly-owned subsidiary” named the Diamond Sports Group. Byron Allen - owns The Weather Channel - has purchased a minority stake (and will be a content partner) in the newly formed holding company. Sinclair CEO Chris Ripley said that the deal would “more than doubleSBGI’s annual revenue to $6.7 billion and triple its EBITDA to $900 million” - which explains why shares soared +35% to an all-time high ($60.48) on Monday.

Howie Long-Short: Not everyone is bullish on Sinclair’s purchase. BTIG media analyst Rich Greenfield wrote that “most, if not all of the [RSN] earnings could be wiped away over the next 4-5 years. It is no wonder that every major private equity firm pulled out of the process.” Octagon SVP (global media rights division) Dan Cohen respectfully disagrees with that assessment saying Greenfield is looking at the deal from the perspective of “today’s products, today’s rate of cord-cutting and today’s revenues; he’s not considering the expected changes in the marketplace that can propel the businesses forward. Sports betting and digital broadcast rights - which will help to balance out the linear offering - will play big roles in the years ahead.” Historically, RSNs have offered little beyond the game, pre-and postgame coverage.

Cord cutting and changing consumption patterns are undeniably, negatively impacting the cable industry, but as Cohen emphatically stated “live sports [and news] remain the most compelling programming a broadcaster can own and live community based viewership remains very healthy. The live broadcast of games will take different forms, but it won’t be going away.” Ripley agreed saying "no matter what happens to the cable bundle, streaming, digital — these games will have a place in any ecosystem.”

A lack of competition enabled SBGI to take down the lot of RSNs for less than initially projected. Without “the new digital tech giants” (think: Amazon, Facebook, Twitter) involved in the bidding process and companies like Comcast and Fox content to sit on the sidelines, DIS was unable to command in return what it paid to acquire the cable networks (lost +/- $6 billion). It’s not that the tech giants weren't/aren’t interested in local sports programming - they simply “lack the technological capabilities to effectively monetize local advertising; which explains why all of the rights they’ve chased to date (yes, AMZN’s minority stake in YES is the exception) have been national or global in nature.”

Collectively the 21 RSNs hold the local broadcast rights to 14 MLB, 16 NBA & 12 NHL clubs. Maintaining those rights is crucial to SBGI’s long-term success and in a rapidly changing sports media environment there’s certainly no guarantee the company will be able to hold on to them beyond the expiration of the current deals, but with a weighted average of 11 years remaining on each of the team agreements and staggered expiration dates, SBGI does inherit a level of security.

RSNs carry amongst the highest retransmission fees on cable television and some will continue to rise with escalators in their current deal increasing payments to teams, so the possibility that SBGI runs into carriage disputes - much like SportsNet LA has in Los Angeles - is another potential threat to the business. To avoid the same results, Sinclair plans to take a different approach to negotiations; “they’re talking about tiers, bundling (sports with local news) and discounting based on the amount of programming a distributor will take on.” 

Moving forward Cohen believes that the leagues and teams themselves pose the greatest threat to SBGI’s ownership of the broadcast rights. “There’s an inherent interest on the part of content developers to own the pipes that their content flows through and the projected meteoric rise of sports gambling has teams and leagues wanting to retain a bigger slice of the pie.”

That doesn’t necessarily mean that Sinclair is going to be left on the outside looking in during the next round of local rights negotiations. Cohen says “it’s one thing for a team to say they want to take the rights back, but it’s another to become a DTC technology company; streaming sports remains a challenge. The alternative is to reacquire the rights and then re-sell them. But if the marketplace doesn’t shift much, there’s no one to sell them back to except Sinclair” (or a competitor like Comcast).

Fan Marino: As the runner-up for the RSNs, it’s unclear where Liberty Media goes from here. Cohen said, “they’re not going to buy local stations - if they were, they would have bought Raycom with the Braves in the Atlanta market - they didn’t get the RSNs, the rights to the WWE or the UFC.” One possibility is that they “continue to buy up more properties and own the IP.” NASCAR is on the market, but it’s not like Liberty has been successful with the first foray into motorsports. As we wrote back in January, the company is looking to decrease their stake in F1.

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