Latest in Diamond Sports Saga Suggests RSNs Will ‘Be Around For a While’

Latest in Diamond Sports Saga Suggests RSNs Will ‘Be Around For a While’

Diamonds Sports Group may end up emerging from bankruptcy after all.

“It doesn’t sound like the judge [overseeing the case] thinks this business should be liquidated,” media consultant Patrick Crakes said. 

DSG’s bid to obtain $450 million in debtor-in-possession financing was approved in late February. With that approval, contingency agreements to return broadcast rights to NBA and NHL team partners were voided. Judge Christopher Lopez called it a ‘very good day’ for the RSN conglomerate.

And by proxy, the broader sports landscape.  

Former MSG Company CEO and Cablevision vice chairman Hank Ratner explained that if Diamond Sports beats the odds, it would be a ‘reprieve’ for the embattled RSN industry. 

“It would be a good day for local sports rights because it would signal that the ecosystem, which has been so valuable to the teams, has room to continue on,” he said.

But even if the judge views Diamond’s regional sports business to be viable today, it’s fair to wonder about its long-term prospects.

“What happens from here is no foregone conclusion,” Ratner said. Even if DSG manages to extend its existing deals with distributors, “we’re going to continue to get erosion in core affiliate and advertising revenues, and whatever streaming play ends up happening, it’s never going to offset [the lost revenue]. So, how long can [the model] be sustained?”

Diamond formally submitted its official reorganization plan to the United States Bankruptcy Court for the Southern District of Texas, Houston Division, last week. Post-bankruptcy financial projections were not filed at the time.

A hearing is set for April 17.

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Diamond Sports Group appeared to be headed towards an almost certain extinction just a few months ago. The RSN conglomerate had agreed to forfeit its NBA and NHL broadcast rights at the end of the current season, and was closing in on a deal to do the same with MLB. 

That outcome would have almost certainly resulted in short-term revenue losses for many of the 30+ clubs that call the a DSG RSN home, and had catastrophic downstream effects on the three leagues.

It now appears as if Diamond may be positioned to emerge from bankruptcy with nearly a billion-and-a-half dollars in working capital and new ownership; its unsecured creditors.

Over the last month and change, “Sinclair rolled over and agreed to give Diamond $495 million to settle a billion and half dollar lawsuit over management fees, and the unsecured creditors came up with another $750 million,” Crakes said. 

Tack on the DIP financing referenced above and $115 million in convertible notes Amazon committed to pay once DSG officially exits bankruptcy, and the company has been capitalized with nearly $2 billion before any new investors come in.

While many observers are surprised with how the Chapter 11 restructuring has played out, Crakes suggested it was an inevitability.

“The unsecured debt holders, [which own ~$8 billion of the ~$9 billion in debt, always] thought the plan that Diamond filed in January was a good one,” he said.

It keeps the keeps the RSNs in the pay TV bundle (albeit perhaps on a higher priced tier), which is their best chance to see the money again.

Regional sports networks will never be ~50% margin businesses again, but they can still viable.

“What Diamond proposed probably has a 15-20% margin on it in aggregate,” Crakes said. 

Remember, this is not the Sinclair Broadcast Group run operation that was accused of being heavy handed with teams, leagues, and distributors. Randy Freer and David Preschlack have been able to clean up many of the problems with the DSG business.

But “if the rights fees [you’re paying out] are too high and your subs are falling too fast, it might not be viable in the long-term,” Ratner said.

So, the obvious question is what will happen to the teams’ existing rights contracts.

The resurgent RSN operator now holds leverage over team partners with more than a year remaining on their contract, and is expected to use it.

DSG “has already renegotiated some of these deals and the ones that won’t renegotiate they will let go of,” Crakes said.

Expect the bulk of NBA and NHL team partners to avoid rocking the boat. There’s nowhere else for most of them to go. Clubs who have left the RSN ecosystem have found replacing local pay TV economics to be impossible.

And as long as pay TV distributors allow these organizations to experiment with alternative forms of distribution (which they should with fees and eyeballs declining but did not do with several MLB teams last year), there’s little reason to bypass the money. 

MLB teams hold more value in the RSN ecosystem (because they provide more inventory), and Commissioner Rob Manfred, who wants to launch an in-house streaming service, is opposed to any further reductions. So, DSG’s baseball partners are going to be more inclined to play hardball (more on this next week).

But the league isn’t going to backstop clubs again, meaning some clubs could be in for a significant haircut. 

Rights owners might want to begin planning for how they will make up the lost local revenue. 

It has been suggested that some properties may look to package local digital rights with a national package. Sportico reported the NBA can revoke the non-linear rights sold to Amazon if the e-commerce giant fails to meet certain benchmarks.

But doing that might jeopardize the money coming in from RSNs, and it’s hard to imagine the incremental gains moving the needle for a top-tier sports league, anyway. 

“I don’t see the revenue in that model coming close to the rights fees historically paid for and funded by the bundle,” Ratner said.

Crakes agreed. “If you think about Amazon and digital rights [distribution deal it signed valued] at $115 million, that shows you [how little the] digital rights are [worth to] individual teams.”

The truth is that the bulk of general market fans remain inside the pay TV bundle.

Real estate development is another business line teams will try and tap into. 

If organizations can manage to retain at least half their local media rights revenue, and find some new ways to grow the business, they may be able to maintain local economics; albeit with more risk than we’ve seen historically.

“In the end, it probably has to be accounted for in the valuations of a lot of these franchises,” Crakes said. “Not all. Again, the Yankees have no risk.”

That is because not all RSNs are created equal.

“It all depends on the market and the deals,” Ratner said. “You have regionals in New York and other major markets that are very strong. Some might be declining, but still throw off big cash flows, and others [are seriously challenged] and might not be sustainable.”

DSG emerging from bankruptcy would suggest, when run properly, even a declining RSN business should be more profitable than the alternatives.

So, expect “RSNs to be around for a while,” Crakes said.

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