Whatever you think about Sinclair Broadcast Group's planned direct-to-consumer offering, slated for next year, one thing is certain: in the near term it really doesn’t mean that much. A more pressing deal, and one that may have even broader implications to the broadcast giant, could be answered in the next few weeks -- its carriage deals with No. 2 satellite TV service provider Dish Network.
Sinclair's retransmission consent agreement with Dish expires on Aug. 15, and many have expected that carriage of the RSNs will become a big part of that negotiation. Dish represents about 8 million subscribers for Sinclair, and the company has said in Securities and Exchange Commission filings that it is counting on the revenue from that Dish deal to keep its engines humming.
“The Dish deal has become overly important,” sports consultant Lee Berke, president and CEO of LHB Entertainment & Sports, said. “There is no question it is an issue, but now everybody is focused on it.”
The jury is still out as to just what Sinclair is willing to do to ensure that carriage. Some have speculated that the broadcaster could allow Dish to place the RSNs on tiers -- long a bone of contention between programmers and distributors -- and/or offer the satellite TV giant an equity piece of its DTC offering. So far, neither side is saying anything officially about the talks.
Dish has pushed for tiering sports networks before -- it was one of its reasons for dropping the Sinclair RSNs in 2019.
In an interview in 2019, Dish executive VP Andy LeCuyer didn’t say the “T-word,” but it was pretty clear what the company wanted.
“We think the RSN content should be sort of like a ticket to the ballpark. Fans who love and want that content should be the ones who pay for it, not forcing the vast majority of other subscribers to subsidize it, ” LeCuyer said in that 2019 interview.
Dish declined to comment on the current negotiations with Sinclair, but perhaps the company will have more to say when it releases its Q2 results on Aug. 9.
Now, with the negotiating ball clearly in their court and the pressure to make a deal squarely on Sinclair, it could be Dish’s best chance ever to make that happen.
And though Dish chairman Charlie Ergen has been critical of Sinclair’s sports networks in the past, Dish could be open to a deal, especially after it ended a three-year blackout of premium channel HBO on July 29. Dish let HBO go dark on Oct. 31, 2018 claiming high prices and retaliation by HBO parent AT&T over Dish’s objection to its merger with Time Warner Inc. When the dispute was settled, Dish subscribers were allowed to purchase HBO’s streaming service HBO Max at a 20% discount ($12 per month for one year) and get sister premium channel Cinemax, for $10 per month.
Sinclair apparently baked in the Dish deal in a proposal to its bondholders to restructure about $8 billion in debt at its Diamond Sports Group unit, the vehicle that houses its RSNs. In an 8-K filed with the Securities and Exchange Commission in June, Diamond Sports estimated its revenue would be between $3.07 billion and $3.249 billion in 2021, and analysts have estimated that about $400 million of that would come from Dish.
According to the 8-K, Sinclair said the talks with bondholders were ongoing, but the companies were “unable to reach a definitive agreement at the time.” Some analysts took that to mean bondholders wanted to see how the Dish talks panned out before committing to a deal, which according to some reports included a proposal to get bondholders to invest an additional $300 million to $500 million in Diamond Sports.
On its conference call to discuss Q2 results on Aug, 4, Sinclair CEO Chris Ripley chafed when an analyst characterized the proposed restructuring as “unsuccessful,” adding that he saw it as more of a move “towards a deal that is amenable to both sides.”
He added that Sinclair didn’t want to do just any agreement, but wants the right agreement. Just what that is, he didn’t say.
To be fair, Ripley is really in a difficult place. He can’t say anything about ongoing talks with bondholders or distributors because of non-disclosure agreements and as a result, investors and onlookers assume the worst. Only time will tell the true story, but unfortunately time is running out.
Sinclair stock has been battered over the past two years, rising as much as 46% to $61.81 per share in the days after it said in May 2019 that it would buy the Disney RSNs. The stock has been on a downward slope practically ever since, closing at $31 each on Aug. 6, down about 1% for the year and priced at about half what it was in May 2019.
Ripley was frustrated about the stock performance, devoting a good portion of his opening statements on the conference call to what he said was a “significantly undervalued” stock.
During the presentation he went through a sum-of-the-parts valuation of Sinclair, pointing out its warrants for Bally stock -- part of its deal to sell branding rights to the RSNs in 2020 -- that are worth about $600 million at current prices and would cost Sinclair about $60 million to execute; a $1.2 billion tax shelter benefit that also came out of the RSN buy; the $1.7 billion value of its licensed broadcast spectrum; and finally, $200 million in non core businesses and equity stakes in companies like antenna maker Dielectric and 5G solutions provider Saankhya Labs. And that’s not even including the value of its core TV broadcast and cable networks businesses.
“When you put even a conservative valuation on our 185 TV stations, Tennis Channel, stadium, news on STIRR and RSNs and account for the net debt of Sinclair, you will get a per share value that is more than double the current level of where our stock is trading today,” Ripley said.
But there are a lot of factors to considering share prices, and right now Sinclair is in the middle of a transition. In a research note, Wells Fargo Securities media analyst Steven Cahall noted that Sinclair's investor base has shifted from broadcast-centric to a broadcast/media/gaming hybrid, which has caused some confusion. .
“Investors are recalibrating, and we think, not sure quite what to do with the new Sinclair,” Cahall said in a research note. “Things have not gone well for the RSNs, leaving no equity value, consuming management resources (e.g., potential restructuring, loss of sports during coronavirus) and non-stop estimate revision risk. We also think the RSNs can drag TV retrans as SBGI supports the whole portfolio in future deals.”
So, in other words, all eyes are on the Dish deal.
At the moment, Dish appears to be in the best negotiating position. The old threat that keeping the channels off will lead to subscriber losses means little because any such declines have already happened. Dish has little to lose by not carrying the RSNs, and therefore could force some concessions in negotiations that Sinclair might otherwise reject. Some believe that Dish could be allowed to put the RSNs on a separate tier as well as receive a small ownership interest in the DTC offering.
Allowing RSNs on a tier could affect future negotiations with other distributors, but some observers believe that Dish is enough of an outlier that Sinclair will be able to keep its other deals intact.
“I don’t think you can lump all of the RSNs together and say this is a bellwether,” said one sports exec who asked not to be named, adding that while tiering isn’t optimal, he’s more worried about allowing distributors to cherry pick which RSNs they want to carry. But he also conceded that shifting to a tier-model would shave linear carriage at least in half.
The rest of the RSN business is somewhat insulated in its ownership. Comcast and AT&T own the NBC Sports RSNs and Root Sports RSNs respectively, so if they were going to get placed on a tier, many believe it would have happened already. Others like MSG, SNY and YES Network are in major markets where tiering may not have that huge an impact.
“Sinclair is going to do whatever it has to do to get this deal done,” the sports exec said. “They’re going to be as creative as they can get. If they have to shave off certain RSNs, if they’ve got to tier, they're going to do whatever they can.”
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Mike Farrell is senior content producer, finance for Multichannel News/B+C, covering finance, operations and M&A at cable operators and networks across the industry. He joined Multichannel News in September 1998 and has written about major deals and top players in the business ever since. He also writes the On The Money blog, offering deeper dives into a wide variety of topics including, retransmission consent, regional sports networks,and streaming video. In 2015 he won the Jesse H. Neal Award for Best Profile, an in-depth look at the Syfy Network’s Sharknado franchise and its impact on the industry.