Regional sports networks, once considered the crown jewels of broadcasting, are now hardly congruent

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In a stunning reversal of fortunes, rumors have been circulating that Diamond Sports Group (DSG), a subsidiary of Sinclair Broadcasting Corp., which owns the Bally Sports Networks (formerly Fox Sports Networks, as well as YES Network and Marquee Sports Network (co-owned with the Chicago Cubs)) is in trouble. It is reportedly on the brink of bankruptcy just months after launching a streaming service for the Regional Sports Networks (RSNs) called Bally Sports Plus (BSP).

Just a few months ago, management was touting that the streaming service could bring in $1.3 billion to $1.9 billion in revenue five years from now and $444 billion to $1.3 billion in EBITDA by 2027.

Management is reportedly in talks with the NBA, MLB and NHL for a fire sale buyout. Under the plan, creditors would take over the RSNs, give Sinclair $3 billion in cash and a minority stake in DSG, and then sell the RSNs back to the leagues. This becomes difficult as many of the RSNs offer multiple sports.

Additionally, MLB has only given Sinclair rights to five of 14 teams and is requiring additional payment for the streaming rights, which DSG is reluctant to do. MLB reportedly has a contingency plan in place should DSG file a Chapter 11 filing that would broadcast the games in local markets and charge cable and satellite companies a fee for broadcasting. That would be a short-term plan until DSG emerges from Chapter 11 bankruptcy.

On another front, MLB is considering launching its own streaming service next year. That’s partly because the trustee could reject some of the sports contracts and demand lower fees if DSG were immersed in Chapter 11. This would give MLB and others an opportunity to walk away from the relationship mid-contract.

Burdened under $8.6 billion in debt, BSP should be the Hail Mary to save the RSN unit. However, start-up losses in service coupled with a shortage of cash have plunged Diamond into financial turmoil.

Sinclair responded to the rumors with the following statement: “Speculations raised by anonymous sources are just that, speculation. We enjoy the full support of the teams, NBA and NHL leagues and look forward to continuing our work with them to transform the RSN model.”

The fact that Sinclair could end up walking away with $3 billion in cash and still hold a stake in DSG if Diamond’s subsidiary is technically insolvent and creditors could force it into bankruptcy is a testament to savvy financial engineering of management. Structuring Diamond as its own subsidiary and funding it primarily with other people’s money was a brilliant move.

The company is clearly a victim of cord-cutting (when people cancel their existing cable, satellite, or telecom video package) and cord-shaving (when people downgrade to a cheaper multi-channel bundle). Fixed sports rights costs are rising while variable revenues could fall as consumers continue to snip the cable.

When Sinclair Broadcasting bought the Fox Sports networks, they were considered the crown jewels of the cable networking industry. The company projected that it would generate estimated $1.6 billion in 2019 EBITDA (earnings before depreciation, interest taxes, and amortization) when Sinclair made a $8.5 billion bid for the channels.

In fact, management recently said it expects EBITDA to be just $183 million to $200 million in 2022, showing how hard and fast their fortunes have fled. That’s not even enough cash flow to pay interest on their debt load, let alone any principal.

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