Though the long-awaited wide launch of Diamond Sports Group LLC's Bally Sports+ in-market direct-to-consumer service should have marked a bright spot for the company, financial pressures and bankruptcy concerns continue to loom over the group.
Diamond, the Sinclair Broadcast Group Inc. subsidiary that operates the company's regional sports network business, is saddled with $8.65 billion in debt. On the linear side, the group has struggled to grow revenues amid declining pay TV subscriber numbers, while delays in launching the streaming service have led to multiple revisions in full-year 2022 guidance.
Amid all this, the New York Post this month cited sources close to the situation saying that MLB, the NBA and NHL are expected to initiate talks to buy out Diamond Sports. In the absence of new ownership and investment, according to the report, Diamond could otherwise be headed toward a potential bankruptcy filing. The report followed earlier news that Diamond had hired Liontree Partners LLC and Moelis & Co. to pursue strategic alternatives.
Sinclair called the Post report speculation from anonymous sources, saying it is moving forward with its direct-to-consumer, or DTC, initiative under the Bally Sports+ brand.
"We are executing our business plan and we are excited about the full launch of our direct-to-consumer product on Sept. 26 heading into the start of the NBA/NHL regular seasons," a Sinclair spokesperson commented to S&P Global Market Intelligence. "We enjoy the full support from the teams, NBA, and NHL leagues, and look forward to continuing our work with them to transform the RSN model."
But credit and cable analysts note that even with the Bally Sports+ launch behind it, Diamond's financial problems have been mounting for some time and will not be easily solved, even with a sale.
"Diamond is going to file for bankruptcy at some point. Hopefully, it's not a freefall," said Adam Rhodes, a senior distressed debt analyst at the credit analysis firm Reorg.
Seeking advice
According to Sinclair, it has been engaged with Moelis and Liontree for the last two years in pursuit of two objectives: strengthening the balance sheet and bringing in strategic partners.
"An exchange offer and financing was completed in March of 2022, and we continue to work with these advisors to further those same objectives," the company said.
While the $635 million refinancing in March closed some of the covenant loopholes that were in Diamond's debt, Diamond Sports still faces a number of looming obligations, according to Rhodes. He said Diamond faces higher rights fees and production costs going forward, continued rebate payments to distributors for games lost to the pandemic, and significant interest payments in the first and third quarters of 2023.
"While Diamond will likely have adequate liquidity to avoid a first-quarter 2023 bankruptcy filing, difficult distributor negotiations, significant interest payments and the strategic rationale of a filing prior to large sports rights payments might prompt such a move," Rhodes wrote in a report.
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Reorg estimates Diamond's cash interest obligations are approximately $212 million in each of the first and third quarters. Diamond Sports reported approximately $800 million of liquidity as of June 30.
Moelis and Liontree did not respond to requests for comment.
Show me the revenue
The problem is not just Diamond's debt but also its opportunity for revenue growth.
The entire RSN universe has sustained significant subscriber erosion, according to Kagan, a media research group within S&P Global Market Intelligence. It estimates that combined subscribers across 46 networks could decline to 109.2 million in 2022, down from its peak of 191.5 million in 2014.
As for Diamond, its RSNs never regained carriage on DISH Network Corp. even as Sinclair struck a retransmission-consent renewal agreement for its TV stations in November 2021. The sports networks also lost placement on a number of virtual multichannel video programming distributors and could face difficult renewal negotiations with Comcast Corp. and DIRECTV, whose contracts expire in the second half of 2023.
Even the networks' carriage with Charter Communications Inc. could be in jeopardy, according to Rhodes. He pointed to a carriage renewal deal that Sinclair and Charter signed in April. "The wording is an extension to a multiyear deal, not a multiyear extension," Rhodes said.
While Diamond expects revenues and EBITDA to accelerate in the wake of Bally Sports+ launching across its RSN markets in the U.S., it is unclear whether the platform can make up the lost revenues from linear distribution, said Kagan analyst Scott Robson.
"The DTC platform is likely only going to help mitigate losses from declines in subscribers," Robson said. "I don't think there will be high enough adoption of the DTC service to get the trend going in the other direction for the RSNs given the high price point."
Bankruptcy and sale considerations
Robson said Diamond's debt load is a big obstacle for Sinclair trying to sell the RSNs, so a restructuring is likely.
Should Diamond seek reorganization protection, Rhodes said under the bankruptcy code, Diamond would likely not be required to make rights fees payments to the teams until either the assumption of a particular contract or confirmation of a plan.
In the absence of Diamond's fees to the teams, the leagues might have to take lines of credit to make clubs whole, said Curt Pires, principal of sports program management and distribution company CAP Sports.
Given that prospect, Pires said he would not be surprised if the leagues are looking to reach a deal with Diamond. With control of local team rights, the leagues could seek deals with Amazon.com Inc. and Apple Inc., which are both increasing their sports holdings. Peacock, NBCUniversal Media LLC's aggregate streaming service, could also be an option.
The leagues could also provide their own local DTC package offerings. That option could be particularly important for the NBA, whose current national deal with Warner Bros. Discovery Inc.'s Turner Sports and Walt Disney Co.'s ESPN expires with the 2024-25 season.
None of the three leagues responded to requests for comment.
When Sinclair purchased the then FOX-branded RSNs from Disney in August 2019 for $9.6 billion, Kagan estimated that the company paid a cash flow multiple of 8.2x. Assuming cash flow multiples of 10x, 8x and 6x against the RSNs' estimated 2021 cash flows gives the current Bally Sports portfolio a valuation range of $9.37 billion on the high end and $5.62 billion on the low end, according to a recent Kagan report.
DTC doings
Thus far, Sinclair has remained extremely bullish about Diamond's prospects.
In an August earnings call, Sinclair President and CEO Chris Ripley said early DTC subscription volume exceeded expectations despite very little marketing, but he did not provide specifics. Ripley said the company offered a seven-day free trial to the DTC service, and 74% of those who had signed up at that point had converted to paying customers. Pricing is $19.99 per month or $189.99 for an annual subscription.
Under the most bullish scenario from a filing earlier this year, Diamond Sports said if the planned service had launched in April, it could count as many as 975,000 streaming subscribers by the close of 2022, generating $237 million in streaming revenue. The company said the customer base could subsequently reach 2.98 million and generate $635 million in streaming revenues the following year, according to the filing.
With the DTC expansion, Diamond is expected to add interactive capabilities including stats overlays and in-game engagement features as it makes DTC feeds available around 12 NHL clubs and 16 NBA teams.
"Everything we've seen so far gives us conviction around our long-term target of getting this product up to 5 million to 10 million subscribers," Ripley said.