Sinclair Broadcast Group and JP Morgan have filed motions in a Texas federal bankruptcy court seeking dismissal of lawsuits rendered against them by the broadcaster's spun-off Diamond Sports Group subsidiary.
Bankrupt Diamond, which was set up to manage Sinclair's heavily leveraged Bally Sports regional cable channels, said in a lawsuit filed in July in the court overseeing its restructuring that Sinclair "milked" it out of around $1.5 billion, through means such as charging the subsidiary shady management services fees.
Diamond also sued JP Morgan, claiming the bank was allowed to improperly cut in line in front of other creditors and was made whole because of that advantage
In its motion filed Tuesday, Sinclair dismissed Diamond's repeated "milking" allegations as "lactose-infused rhetoric," claiming it had every interest of its own to make Diamond and Bally Sports successful after putting $1.4 billion of its own cash into acquiring the Bally Sports channels from Fox.
"The debtors’ complaint strains to portray a nefarious plot by Sinclair at Diamond’s expense. Beneath the overheated rhetoric, however, the debtors’ own allegations present a series of ordinary business transactions and extraordinary efforts by Sinclair to support the Diamond enterprise, including in the face of a global pandemic and unprecedented business disruption," Sinclair's motion reads.
Sinclair argues that Diamond had to get management services provided from someone, and the subsidiary -- sporting "newly manufactured antagonism" -- never told the court what those services might cost otherwise if they were provided by a party other than Sinclair.
Meanwhile, Sinclair said that Diamond's quest to reclaim $929 million paid back to Sinclair's preferred equity partner JP Morgan would violate bankruptcy laws pertaining to how securities are dealt with in restructuring.
"Preferred equity units are securities, and the transfers here relating to them are qualifying transactions protected under Section 546(e)," Sinclair's lawyers argue.
Sinclair paid $10.6 billion in 2019 to acquire 19 Fox SportsNet-branded regional sports networks which were, at the time, spinning off margins in excess of 50%.
Shortly after that purchase, the channels were dumped by Dish Network and cord-cutting accelerated in a rather dramatic way. Meanwhile, the pandemic wiped out live sports for months.
In March, Diamond Sports Group -- the subsidiary established by Sinclair to manage the channels, rebranded as "Bally Sports" -- entered bankruptcy, looking to renegotiate team deals, trade equity for debt relief and shed over $8 billion in debt overall.
At the end of September, Diamond is scheduled to finally reveal a finished restructuring plan, but many questions still await answers.
With the National Basketball Association and National Hockey League seasons getting underway next month, how many renegotiations with Bally Sports-affiliated teams in those leagues await? Even harder to answer right now: Are there any teams for which agreements won't ultimately be hammered out, resulting in Diamond using Chapter 11 to cut ties with them?
Amid this volatility, Diamond must negotiate new carriage deals with DirecTV, Comcast and Charter Communications. As Disney's complicated renewal of ESPN with Charter just showed us, pay TV operators are leery of big licensing rate increases for even live sports these days. And how much will the current flux of the Bally Sports team/channel lineup complicate those negotiations?
