RSN Redux

Speculation around The Walt Disney Co.’s auction for the Fox’s 22 regional sports networks has gained some considerable heat over the past few weeks. The latest is that cable legend John Malone, who once owned most of those networks in an earlier life, is gathering up partners for a possible bid.

Disney put the networks up for sale in October,  a condition of federal approval of its larger $71.3 billion purchase of certain 21st Century Fox assets. As part of that approval, Disney agreed to sell the channels within 90 days after closing the bigger Fox deal. With some analysts predicting the Fox transaction could close as early as the latter part of March -- officially, Disney is saying the deal will be completed in the first half of the year -- time is of the essence.

On the surface, regional sports networks would seem easy to sell -- sports, next to live news, is one of the few remaining ratings grabbers in the TV business. But RSNs come with a lot of baggage. For starters they are tiered by most distributors, which limits their total number of viewers. They are expensive -- the larger RSNs can garner monthly affiliate fees well in excess of $4 per subscriber per month. And the largest and most attractive RSN in the mix -- the New York Yankees’ YES Network -- likely won’t be part of the sale. The Yankees have the right of first refusal to purchase Fox’s 80% interest in the network, and are reportedly talking to private equity players and online retailing giant Amazon about pairing up for a bid.

With YES out of the mix, that leaves regional sports networks in towns like Atlanta, Dallas, Los Angeles, Detroit, Minneapolis and Kansas City. Already several potential suitors have lined up -- Sinclair Broadcast Group, private equity players like Apollo Global Asset Management, Major League Baseball itself, and Malone. 

John Malone

John Malone

According to a report in the NY Post, Malone, who owns baseball’s Atlanta Braves, is reportedly talking to Platinum Equity chief Tom Gores (who also owns the NBA Detroit Pistons) and Jim Pohlad, owner of MLB’s Minnesota Twins, about ginning up a bid. Fox Business was first to report on Malone’s interest. The owners are apparently worried that an outside buyer of the RSNs would allocate more resources to larger markets and leave smaller teams in the lurch. Other teams could join Malone, including the Arizona Diamondbacks and Milwaukee Brewers.

Related: MLB Commissioner on Fox RSNs: We’re Interested 

But there could be another unintended beneficiary of the Fox RSN deal -- MSG Networks. MSG, which operates two sports channels in the New York market, MSG Network and MSG + -- could be the missing piece of the puzzle for any buyer. With YES out of the mix, MSG is the only other New York area RSN available -- SportsNet NY is owned by The New York Mets baseball club, Comcast and Charter and isn’t likely for sale. And an MSG Networks buy would be pretty clean -- the company split from its former parent Madison Square Garden in 2015 -- and is a pure-play sports network.

In a research note, FBN Securities media analyst Robert Routh said Liberty’s reported interest only enhances the takeout value of MSG.

“Here we think it is more likely than not the Yankees will exercise their right of first refusal on the 80% of the YES Network currently owned by Fox,” Routh wrote. “If the case, then whoever buys the Fox RSN’s will likely need a NY area sports RSN to make the “RSN Group” work. Here, MSGN remains the only other game in town and we think the current multiple does not accurately reflect this.”

Malone apparently wasn’t interested in getting into the RSN fray earlier in the process, but fears about being pushed around by a larger owner apparently spurred him to action. According to Fox Business, Liberty CEO Greg Maffei let Disney know it was interested as the second round of the auction closed. 

Malone is no stranger to the sports business -- his Prime Sports morphed into Fox Sports RSNs in 1995 after he struck a deal with Fox, later selling his stake in the channels to the programmer in 1997.  Malone also has interests in other RSNs through his investment in Charter Communications, in Los Angeles -- the NBA Lakers’ channel Spectrum SportsNet and the MLB Los Angeles Dodgers’ SportsNet LA.

Related: Books Out on Fox RSNs 

Disney hasn’t said much about the auction aside from acknowledging it’s been going on, but that hasn’t stopped speculation from running rampant. On Disney’s Feb.5 earnings conference Disney CFO Christine McCarthy recognized the noise.

“There's a lot of chatter out in the market,” McCarthy said of the RSN auction. “I won't comment on it, just to say that not everything you hear is necessarily true.”

Related: The Curious Case of the RSNs 

But the longer the auction drags on, the lower the value of the networks. When it became clear that Disney would have to sell the RSNs to gain approval for the larger Fox deal, analysts valued the channels at between $20 billion and $22 billion. But as time has gone on, that value has plummeted, with some reports placing the value of the RSNs -- sans YES Network -- at around $10 billion, or between 6 times and 8 times cash flow.

Some observers have hoped that Malone’s involvement could goose what has been a lackluster auction process, with some reports saying a potential deal could now cost $13 billion or more, still well below the $20 billion once hoped. But Malone has traditionally been a bargain hunter -- in the past he has left the grand gestures to free spenders like Fox chief Rupert Murdoch and others. And early reports said he was leaning toward offering what others had bid -- $10 billion. Malone could well bid more, but it’s his move. And that’s just how he likes it.