Specialist
Current SVP at Octagon Inc
Agenda
- Bankruptcy scenario analysis for Sinclair’s (NASDAQ: SBGI) Diamond Sports RSNs (regional sports networks), highlighting potential rights claims and implications for teams
- Likelihood of remaining 10 MLB teams offering streaming rights for slated April 2022 D2C product launch
- Pushback potential from the MVPDs (multichannel video programming distributors), MLB, NHL or NBA – potentially necessary recourse and risk of removal from basic cable packages
- Sinclair’s value proposition as a long-term strategic partner to teams, highlighting alternatives for popular franchises
- Downside risks, focusing on potential delays to D2C product release, uptake obstacles and possibility of MLB launching its own product
Questions
1.
How could a potential bankruptcy at Sinclair’s debt-laden and distressed Diamond Sports subsidiary affect team media rights, considering the credit vehicle there? Could Comcast SportsNet Houston and Dodgers going through bankruptcies be precedents here, where the rights were perceived as materially breached? How different is this situation given the scale of team rights involved? Could events play out differently in a hypothetical bankruptcy?
2.
Many RSN [regional sports network] teams fund payroll and operations through the rights fees from players such as Sinclair. How could this affect how things play out? Would Diamond Sports likely shut off payments to the teams and reject contracts, putting them in dire straits? What workarounds could avoid the fallout if that were to occur?
3.
How much leverage could creditors have through making a claim for the team rights, in the sense that the collateral in the credit vehicle at Diamond Sports goes to creditors in a bankruptcy? Could this additional leverage in a court process raise the eventual payout closer to USD 100m on a team that generates this amount in media rights fees per year?
4.
Is it a conflict of interest for the leagues to place a haircut on the media rights payments that provide 30- 55% of the teams’ incomes? Would this be detrimental to the teams? Could the creditors get a claim and sell it as a JV to the leagues at current rights payment parity, meaning the creditors retain an upside and the leagues don’t have to pay out full price and get an upside in the future?
5.
Are the leagues quality broadcast partners? Could the leagues want to take the burden on, given Diamond Sports pays USD 800m per year to televise the games? Is it feasible for the leagues to produce the games as profitably or more so without a broadcasting partner such as Sinclair?
6.
The MGM bankruptcy may suggest the creditors have a very streamlined way to maintain claims. How does this play into the risk of a Diamond Sports bankruptcy becoming much more lengthy and contentious than one might think, pushing back on the idea that the process will be expedient for the leagues?
7.
What could be the fallout for future RSN rights payments from a bankruptcy filing? How could this affect deal negotiations, appreciating the uncertainty around how events play out?
8.
CEO Chris Ripley was thought to have said Sinclair had the majority of MLB [Major League Baseball] team rights secured in the Q1 2021 earnings call ahead of a D2C product rollout in April 2022, but this may have been misconstrued, with the statement having included NHL [National Hockey League] and NBA [National Basketball Association] deals. He said rights had only been secured with the Marlins, Brewers, Royals and Tigers in the Q3 2021 earnings call. How valuable would a service with all the NBA and NHL D2C rights plus those four baseball teams be at the USD 23 price point floated, or a more reasonable price point? Is enough going on with the MLB teams secured vs more popular ones to generate an uptick with an April 2022 launch?
9.
Why haven’t the remaining teams signed on to D2C rights with Diamond Sports? Is it that the rights aren’t up for renewal yet so it’s a wait-and-see situation or will this never happen? What is driving the hesitation for those teams relative to the four that have signed on?
10.
Is there an incremental amount Diamond Sports could pay to convince more teams to come on? How much more would be necessary to generate buy-in?
11.
How much do you think Sinclair should offer for further MLB D2C streaming rights? What range of payments would make teams consider it further? How could this differ between the most popular franchise in the country and less popular ones?
12.
How much muddiness could come from additional team rights acquisition vs getting the leagues themselves onboard? Whether the leagues have be-all veto power is another question, particularly with MLB – the SEC [Securities and Exchange Commission] filings for Sinclair suggest there’s a clause that would allow the MLB to claw back payments if there were a change in league policy or rules.
13.
The other stakeholder involved is the MVPDs [multichannel video programming distributors], and to my knowledge, the carriage deals are structured so as to prevent D2C distribution. Could this mean Sinclair lacks the ability to broadcast games in April 2022 regardless of having the D2C rights, at least pending any negotiation or recourse they have to offer the distributors?
14.
You suggested a retrans fee reduction would be the most risk-averse path forward for the MVPDs. What magnitude of recourse could they seek? What moving pieces may they consider if it’s a 30-40% cut on a hypothetical USD 6 per month retrans fee for any given RSN? Is it the subsequent pay-TV churn acceleration that would come with making programming non-exclusive? What could play out on the recourse that has to be given?
15.
Carriage has been a an issue for Sinclair. I’m sure it’s trying to negotiate for maximum retrans fees, but this has led to VMVPD [virtual MVPD] drops from players including Dish. How do you assess re-carriage prospects? Is there anything Sinclair may consider to bring stakeholders back to the table and find a happy middle ground if it wants to maximise reach?
16.
How detrimental would it be to Sinclair if distributors moved it out of the base package, especially given this would probably trigger MFN [most-favoured nation] clauses? Do you think the distributors are interested in this? How likely is it given how damaging it would be to Sinclair’s linear business?
17.
How quickly could the 49.4 million or so linear subscribers to Diamond fall 70-80% in a move to à la carte? The cancellations wouldn’t be immediate.
18.
The New York Post reported that MLB may consider a go-it-alone strategy where it offers locally streamed games through MLB.tv. It talks about a USD 10-20 per month price point depending on geography. How possible is this given a lot of the rights are already under contractual arrangements? How disruptive would this be to what Sinclair is trying to accomplish?
19.
How likely is it that Diamond will launch a D2C product in April 2022? Would it be worth delaying the launch if only four MLB teams are signed up, isolating the potential bankruptcy complications?
20.
Is there a counterargument on the MFN dynamic that Sinclair breaking these clauses with the MVPDs would bring the VMVPDs and Dish back to the table in a reverse way? Could a lower price point but wider distribution expand the pie for Sinclair?
21.
What metrics could a Diamond D2C product achieve if it had three leagues with the teams’ rights allinclusive? Could it have 4.4 million subscribers and USD 2bn in revenue, so a USD 38 ARPU in a five-year time frame?
22.
What do you think about a USD 23 price point with all teams inclusive given the other streaming on demand products available? Could this price point need to decrease given going to market is of the utmost importance?
23.
Is there much room for teams to replicate the Cubs, Yankees, Dodgers, Orioles and Red Sox and stand up their own networks profitably? If so, is there a popularity factor that would disallow the model working for anyone else? Could outsourcing broadcasting to a player such as Sinclair be unnecessary? Can teams just seek to regionalise?
24.
What is your percentage probability of a bankruptcy occurring at Diamond Sports? What liquidity profile is needed to avoid this over the next three years? Is it possible for Sinclair to inject more capital into Diamond or to rally interest from PE or strategics such as Amazon or ESPN to get to a point where bankruptcy is unnecessary?
25.
Do you have any closing remarks on Sinclair and Diamond Sports?
