Josh Kosman and Richard Morgan (NY Post) are reporting that the U.S. Justice Department has altered its position on The Walt Disney Company’s (DIS) acquisition of the 22 Fox regional sports networks and are said to be considering a scenario that would allow DIS to spin-off the cable networks; the company would cede operational control of the RSNs. The DOJ had initially mandated that Disney sell-off the sports networks within 90 days of the Fox entertainment deal closing to prevent a sports broadcasting monopoly, with subsidiary ESPN already owning the rights to more sports content than any other broadcaster. The news comes just days after New Fox – the perceived front-runner to take down the lot of cable assets – confirmed in an SEC filing that it would not be bidding on any of the networks. DIS reportedly remains committed to a sale before the end of February.
Howie Long-Short: The DOJ initially felt that if DIS were to add the broadcast rights to 44 pro sports teams to ESPN’s existing portfolio, that the company would be positioned to squeeze carriers in carriage negotiations; further driving up the cost of the cable bundle. While I don’t want to speculate as to why the DOJ is reportedly willing to reverse direction, there is a belief in industry circles that without DIS (or Fox) backing the RSNs (and the leverage that they hold), cable companies could/would opt to leave the costly networks off their basic tiers.
The Justice Department’s change of heart could end up saving Disney billions. New Fox’s decision to pass on what they perceive to be slow growth assets, leaves Sinclair Broadcast Group (with P.E. backing) as the last viable legacy media company capable of buying all 22 RSNs. The NY Post article said Fox’s decision to drop out of the bidding lowered the value of the sports networks to between “$9 billion and $11 billion” (or 5-6x EBITDA). If that’s true and DIS’ theoretical RSN pure play were to trade at the same 8.7x multiple ($16 billion) that MSGN does, a spin-off could net DIS $5 billion to $7 billion more (+60%) than an auction would.
That won’t be the case though. As Dan Cohen, Octagon SVP, Global Media Rights Consulting Division told me, “it’s quite different to compare a single RSN in the U.S.’ largest media market to a set of RSNs. There are factors beyond the viewership differences such as the costs, sets of rights, programming opportunities, etc. Remember, MSG owns the Knicks and Rangers. That dynamic creates stability and a guaranteed cash flow. It’s not the same as 22 RSNs whose rights are varied, where competition exists and higher costs play factors.”
Disney paid +/-$20 billion for the RSNs as part of their $71.3 billion acquisition of Fox entertainment assets, so spinning off the networks would seem like a more attractive option than taking a +/- $10 billion loss, but if the rest of the legacy media companies are suggesting that RSNs are “slow growth” businesses – “at best” – I wondered why DIS would have interest in keeping them. Dan explained that moving forward the RSN business will be “slower growth, not slow. For the past decade+ the RSN business has been booming, a meteoric rise of the like cannot continue at that speed without slowing a bit for some time. However, growth on a RSN level will still move forward and the smart ones will develop business propositions around legalized in game betting and new interactive viewer technologies, and most certainly will need to further exploit the local digital rights as they play out.” For those who read “Early Entrants” (Vol. 1) on Sunday morning, you know that Disney is exploring entrance into the sports betting space.
Fan Marino: New Fox supposedly has a renewed focus on sports, but in the same week the company declared it was out of the regional sports networks business, it declined an option to carry the Big-12 championship game in ’19, ’21 and ’23. SBJ reported that the decision had to do with scheduling (see: they didn’t want it up against the SEC and ACC championship games), but I’m hearing that Murdoch’s company is preparing to go “all-in” on the Big 10 conference. ESPN, which aired the game in ’18 and has the rights in ’20, ’22 and ’24, is likely to pick up the 3 “odd-year” games.
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