In a stunning reversal of wealth, rumors abound that Diamond Sports Group (DSG), a subsidiary of Sinclair Broadcasting Corp. Which operates Bally Sports Networks (formerly Fox Sports Networks as well as YES Network and Marquee Sports Network (jointly owned by Chicago Cubs)) is in trouble. Reportedly, it is teetering on the brink of bankruptcy just months after it launched a regional sports network (RSN) streaming service called Bally Sports Plus (BSP).
A few months ago, management indicated that the streaming service could generate revenue of $1.3 billion to $1.9 billion in five years, and somewhere between $444 million and $1.3 billion in EBITDA by 2027.
Management is said to be talking to the NBA, MLB and NHL regarding a full buyout deal. Under the plan, creditors would take ownership of the RSN, give Sinclair $3 billion in cash and a minority stake in DSG, then sell the RSNs back to the leagues. This will be difficult because many RSNs carry multiple sports.
In addition, MLB has only given Sinclair rights to five of its 14 teams and is demanding additional payment for broadcast rights, something DSG is not averse to doing. MLB has reportedly come up with a contingency plan if the DSG files for Chapter 11, which will broadcast games in local markets and charge cable and satellite companies for it. This will be a short-term plan until DSG emerges from Chapter 11 bankruptcy.
On another front, MLB is considering launching its own streaming service next year. This is partly due to the fact that if a DSG is dipped in Chapter 11, the trustee can refuse some sports contracts and claim a lower fee. This would give MLB and the others a chance to walk away from the relationship mid-decade.
BSP, which weighs a mountain of $8.6 billion in debt, was supposed to be Hail Mary to save the RSN unit. However, start-up losses in the service coupled with low cash sent Diamond into financial turmoil.
Sinclair responded to the rumors with the following statement: “Speculation raised by anonymous sources is pure speculation. We have the full support of the teams, the NBA and the NHL, and look forward to continuing our work with them to transform the RSN model.”
The fact that Sinclair could end up walking away with $3 billion in cash and still own a stake in DSG, when Diamond Subsidiary is technically insolvent and creditors can force it into bankruptcy, is evidence of the management’s clever financial engineering. Structuring Diamond as a subsidiary and funding it mostly with other people’s money was a great move.
The company is clearly a victim of wire-cutting (when people scrap their existing video package over cable, satellite, or communications) and wire-shaving (where people drop to a cheaper multi-channel package). The fixed costs of sports rights go up, while the variable revenue can go down as consumers continue to cut the rope..
When Sinclair Broadcasting bought Fox Sports Networks, they were believed to be the crown jewels of the cable network industry, the company projected that it would generate an estimated $1.6 billion in EBITDA (earnings before depreciation, interest and amortization taxes) in 2019 when Sinclair offered $8.5 billion to the channels.
In fact, management recently said it expects EBITDA to be between just $183 million and $200 million in 2022, illustrating just how hard and fast their fortunes can evaporate. That’s not even enough cash flow to pay the interest on the debt burden, let alone any asset.
