Sinclair Broadcast Group said it has reached a multi-year carriage deal with AT&T for its broadcast stations, regional sports networks and the Tennis Channel.

Sinclair began warning DirecTV, AT&T TV and U-verse customers on Sept. 20 that they could lose access to its channels if a carriage agreement was not reached by Sept. 27. But even as that deadline passed, the broadcaster continued to give the distributor extensions that allowed them to continue carrying the programming while talks continued. 

Sinclair said the new deal includes its newest RSN -- the Marquee Sports Network, a joint venture with Major League Baseball’s Chicago Cubs that will launch next year -- as well as the 21 networks it purchased from Disney earlier this year, as well as the YES Network in which Sinclair is a joint venture partner with Amazon and the New York Yankees. 

Sinclair Broadcast Group would have to face the issue of its fitness to be a licensee if it seeks Federal Communications Commission permission to transfer licenses related to the Fox regional sports networks it is buying from The Walt Disney Co.

An FCC spokesperson said, when asked by inquiring minds like The Wire’s whether or not the FCC will have to review that transaction, that it is up to the companies. That sounds darned sporting of the regulator, but what they meant by that was that, yes, if Sinclair wants to transfer the licenses for, say, transmitting live sports footage back to studios, it must seek the commission’s permission.

But there are other options, as AT&T demonstrated in its purchase of Time Warner, which it was able to structure such that the CNN newsgathering licenses were not being transferred.

According to the FCC, Sinclair can transfer the licenses, thus subjecting the deal to agency review, and expose Sinclair to that fitness issue raised in its aborted effort to buy station group Tribune Broadcasting. Sinclair also could let the licenses expire and reapply for them, or it can turn them in and reapply for them, both of which would also let folks talk about whether Sinclair is.

“But we can’t tell them what to do,” the spokesperson said. Perhaps in this case, but in others you could probably get some industry argument on that point.

With the auction for 21 former Fox regional sports networks all over but the official announcement as of press time Friday, Sinclair Broadcast Group has become, virtually overnight, one of the biggest players in the live sports arena.

Sinclair, along with partners, has apparently submitted a winning bid of $10 billion for the 21 RSNs that were put on the block by The Walt Disney Co. in October as a condition of federal approval of its $71.3 billion purchase of 21st Century Fox programming assets. Sinclair also is a minority partner in the New York Yankees’ $3.5 billion purchase of Fox’s 80% interest in YES Network and it has joined with Major League Baseball’s Chicago Cubs to create the Marquee Sports Network, which will launch during the 2020 baseball season.

If its bid prevails, Sinclair and its partners — Amazon and Byron Allen’s Entertainment Studios were said to be among possible teammates — will have beaten rival offers from Liberty Media’s John Malone, which teamed up with MLB in bidding for the channels, and Big3 Networks, a professional three-on-three basketball league headed by rapper Ice Cube.

Breaking Down Deal Terms

According to sources, Sinclair and Disney were finalizing the paperwork on the deal and were expected to wrap up soon. While the sale still could fizzle, one source familiar with the auction noted that at this point it was Sinclair’s transaction to lose.

The $10 billion price tag for the RSNs works out to be about 6.7 times cash flow for the networks, less than the 7 times the Yankees reportedly paid for the YES Network and well under the 12.5 times Disney paid for the channels as part of the larger Fox deal.

While that is not necessarily good news for Disney or for the state of regional sports — analysts originally expected the networks to attract bids of between $20 billion and $22 billion — Wolfe Research managing director Marci Ryvicker has called it a great deal for Sinclair. She estimated that, assuming Sinclair will get 90% control of the RSNs, the deal represents net free cash flow accretion of about $3.76 per share for Sinclair, equating to an incremental equity value of $26 per share. Sinclair was trading at about $45.39 per share last week.

Ryvicker figures the Fox RSNs would add more than $3 billion in revenue and $2 billion in cash flow to Sinclair. In 2018, Sinclair had total revenue of $3.1 billion.

Sinclair has been aggressively adding content over the past several years, partly in an effort to keep the retransmission-consent revenue flowing from its broadcast affiliates. In addition to its sports properties, the station group also offers STIRR, a free OTT service with sports, news and movies; free local news streaming service NewsOn; action/adventure broadcast network Charge!; and digital TV network Comet TV.

Retransmission-consent growth has slowed considerably in the past few years for station groups. At Sinclair, retrans is expected to grow by “low teens” percentages in 2019 and 2020. The sports channels should help increase that pace.

But there also is a risk. Live sports is the last bastion of appointment TV, with a young, male audience coveted by advertisers. High prices for channels have caused some distributors to lobby to place them on pricier tiers that have limited audiences, though. And RSNs aren’t part of the introductory packages for a lot of streaming services, hindering their distribution growth potential.

Many Renewal Situations Ahead

Sinclair may get a crash course in the value of the channels to distributors. Kagan, a unit of S&P Global Market Intelligence, says there were nine new sports rights deals in 2018 with an average total-value increase of about 100%, and seven new deals so far in 2019 with an average increase of 109%. But the average length of those deals is shrinking amid concerns about the future of pay TV.

“In the next two years, approximately 25% of local sports rights agreements are set to expire, including five at the end of 2019, indicating that opportunities for these new entrants to expand their local sports rights collection in the near-term are limited,” according to Kagan, which said the average RSN license fee rose 8% in 2018 to $2.64 per subscriber. “In the next few years, RSNs will have to rely more on advertising revenues to make up the difference.”

With just about a month to spare, the Walt Disney Co. has settled on a buyer for 21 former Fox Sports regional sports networks, with Sinclair Broadcast Group emerging as the winning bidder with an offer of about $9.6 billion.

Disney put the networks on the block in October, part of the conditions of its $71.3 billion purchase of certain 21st Century Fox programming assets. As part of that deal, Disney agreed to sell the RSNs within 90 days after closing the larger Fox deal. With that deal closing on March 20, Disney had until June 18 to finalize an RSN transaction.

“We are pleased to have reached this agreement with Sinclair for the sale of these 21 RSNs, subject to the conditions of the consent decree with the U.S. Department of Justice,” said Disney senior EVP and chief financial officer Christine McCarthy in a press release.

Sinclair had been in the running for the RSNs from the beginning — it heat out competing bids from Liberty Media and Big3 Networks. As part of the transaction, Sinclair will form a new subsidiary — Diamond Sports Group — which will contain the RSNs. The deal does not include the YES Network, the New York area RSN that was reportedly purchased by the New York Yankees for $3.5 billion. Sinclair was said to be a minority partner in that deal, along with online retail giant Amazon. 

Entertainment Studios founder and CEO Byron Allen has agreed to become an equity and content partner in a newly formed wholly-owned subsidiary of Sinclair and an indirect parent of Diamond Sports. Allen, whose Entertainment Studios purchased the Weather Channel last year, will add some distribution expertise to the partnership. 

After adjusting for minority interests, Sinclair said the deal has an enterprise value of about $10.6 billion.

The RSNs hold exclusive local rights to 42 professional teams consisting of 14 Major League Baseball (MLB) teams, 16 National Basketball Association (NBA) teams, and 12 National Hockey League (NHL) teams. In 2018, the channels had a combined $3.8 billion in revenue and served about 74 million subscribers.

The addition of the RSNs is expected to give further leverage to Sinclair in retransmission consent negotiations for its 191 TV stations across the country, a development that has at least one cable lobbying group coming out against the deal.

On Friday, ACA Connects, which represents hundreds of small cable operators across the country, said it opposed the Sinclair RSN purchase because it will enable the broadcaster to raise prices to millions of consumers.

“Big 4 broadcast network programming and RSN programming are both critical for ACA Connects members,” ACA Connects said in a press release. “By jointly negotiating these assets when they serve the same market, Sinclair can raise prices to cable operators for both offerings.”

The group said that the Federal Communications Commission had similar concerns about Sinclair’s merger proposal with Tribune Media, which was scrapped last year. 

“And it is why we expect antitrust regulators to reject Sinclair's proposed acquisition of Fox regional sports networks as well,” ACA said. “We look forward to making this case at the appropriate time.”

Sinclair expects to pump about $1.4 billion in cash equity into Diamond Sports, including $700 million in cash and $700 million in debt at Sinclair Television Group, Inc.

The deal adds to Sinclair’s sports portfolio, which consists of the Tennis Channel, Stadium (a joint venture focused on college sports and professional highlights), and Ring of Honor Wrestling (professional wrestling). Earlier this year, Sinclair partnered with the Chicago Cubs on Marquee Sports Network, a Chicago-area RSN that is expected to debut in the 2020 baseball season. 

“This is a very exciting transaction for Sinclair to be able to acquire highly complementary assets,” Sinclair CEO Chris Ripley said in a press release. “While consumer viewing habits have shifted, the tradition of watching live sports and news remains ingrained in our culture. As one of the largest local news producers in the country and an experienced producer of sports content, we are ideally positioned to transfer our skills to deliver and expand our focus on greater premium sports programming.”

The RSNs to be acquired by Sinclair are: Fox Sports Arizona, Fox Sports Detroit, Fox Sports Florida, Fox Sports Sun, Fox Sports North, Fox Sports Wisconsin, Fox Sports Ohio, SportsTime Ohio, Fox Sports South, Fox Sports Carolina, Fox Sports Tennessee, Fox Sports Southeast, Fox Sports Southwest, Fox Sports Oklahoma, Fox Sports New Orleans, Fox Sports Midwest, Fox Sports Kansas City, Fox Sports Indiana, Fox Sports San Diego, Fox Sports West, and Prime Ticket. Also included in the acquisition is Fox College Sports.

Guggenheim Securities, LLC, Deutsche Bank Securities Inc., RBC Capital Markets, Pursuit Advisors, and Moelis & Company are acting as Sinclair’s financial advisors. Fried, Frank, Harris, Shriver & Jacobson LLP, Pillsbury Winthrop Shaw Pittman LLP, Latham & Watkins LLP and Thomas & Libowitz P.A. are acting as legal advisors to Sinclair in connection with this transaction. Allen & Company LLC and J.P. Morgan are acting as Disney’s financial advisors. Cravath, Swaine & Moore LLP and Covington & Burling LLP are acting as legal advisors to Disney in connection with this transaction. 

Broadcasters continued to eke out double-digit percentage increases in retransmission-consent revenue in the first quarter, despite mounting evidence that the pay TV universe is shrinking.

A look at some of the top broadcast station groups show that retrans revenue, while still rising at a healthy double-digit percentage clip, leveled off a bit from the triple-digit increases of a year ago. But overall growth at the top five publicly traded broadcasters rose a collective 25% in the period, slightly behind the 35% increases in the first quarter of 2015.

SCRIPPS LEADS THE CHARGE

Leading the charge was E.W. Scripps, which boosted its quarterly retrans haul 92% to $53.6 million, behind the 123.8% increase in the same period last year. Sinclair Broadcast Group — the largest station owner with 172 broadcast properties in 81 markets — maintained a high-single digit percentage increase in the period, although it told analysts those raises will taper off in the next three years as its deals mature.

Sinclair said its next big retrans negotiation will be at the end of the year, with Comcast, and it expects 2017 retrans increases to be in the mid-single digits, dipping to the low-single digits by 2018.

The company, which has been aggressively accumulating stations over the past five years — it had only 58 stations in January 2011 — will have some added leverage in retrans negotiations going forward. It agreed to purchase sports network Tennis Channel in January (the deal closed on March 1), adding to its growing stable of cable networks that include American Sports Network, Ring of Honor and Comet TV. While Tennis Channel had little impact on the first quarter — it had only been officially under the Sinclair umbrella for a month in the period — the network is expected to have influence in future negotiations.

The second-largest station owner — Nexstar Broadcast Group, with 104 properties in 54 markets — saw retrans revenue rise 46.2% to $97.3 million in the quarter, less than the 89.5% increase in the same period in 2015.

Of the top six station owners, all except Tegna, the former Gannett broadcasting group, reported a smaller percentage increase in Q1 2016 than in the prior year. That could be in part because of a declining pay TV subscriber base, as total pay TV customers fell by 1.2% in the quarter. But it is more likely tied to the timing of retrans renewals and overall market maturity. Tegna said it expected retrans to grow more than 30% for the rest of the year.

MVPDs reached several retrans deals with station owners in the first quarter, including Cox (with Nexstar), Time Warner Cable (with Scripps) and Dish (with Cordillera Communications), which likely had an impact on revenue growth. Most of those deals — except for TWC and Scripps — also included brief blackout periods, which one pay TV industry group believes has a huge impact on rates.

The American Television Alliance, a group that includes the traditional pay TV distributors such as Charter Communications, Cablevision Systems, DirecTV and Dish Network, said there were 193 blackouts in 2015 — a new record and more than twice the 94 blackouts in 2014. So far in 2016, 26 blackouts have occurred, and more are expected as deals come up for renewal, usually around major sporting and entertainment events.

The ATVA sees a direct correlation between blackouts and higher retrans fees, adding that oftentimes consumers are forced to pay higher rates after a dark period has ended.

“Each broadcaster’s quarterly earnings report is further confirmation that the retrans cash grab is driving the TV blackout crisis,” said ATVA spokesman Michael Hacker in a statement.

Back in July 2015, SNL Kagan raised its estimates for overall retrans revenue growth to $10.3 billion by 2021, a 63% increase from the $6.3 billion in 2015. CBS alone has said it will generate about $1 billion in retrans revenue in 2016, growing to $2.5 billion by 2020.

RETRANS TAKES UP THE SLACK

Retrans fees have been a savior for some broadcasters, taking up the slack in recent years as the advertising market has tanked. But even as ad sales have begun to rebound — Morgan Stanley media analyst Ben Swinburne said in a recent note that the first quarter was the strongest for national TV ads since Q3 2013, with broadcast advertising revenue up between 8% and 10% — retrans fees continue to rise.

While overall percentage growth appears to have slowed in the first quarter, Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said it probably won’t last long, adding that it could simply be a result of the “law of large numbers.”

“As they keep getting bigger, the growth is going to slow,” Wlodarczak said. “I see broadcasters trying to push through higher fees on distributors to offset lost revenue from cord cutters/shavers, which will of course only exacerbate the problem.”