Diamond Sports, which operates the Bally Sports Regional Networks and its 19 channels, could soon file for bankruptcy protection. But if they do, that doesn’t necessarily mean an end to the RSN deals in place.
It’s become almost a parlor game predicting when the bankruptcy comes — “if” does not seem a necessary conjunction any longer — as the struggling RSN-empire staggers under steep losses generated by cord-cutting and debt from Sinclair’s mistimed 2019 acquisition of the sports media channels. A subsidiary of Sinclair, Diamond in November disclosed a $1.2 billion quarterly loss amid a 10 percent drop in subscribers.
Bloomberg last month reported“Diamond will probably skip a mid-February $140 million interest-only payment servicing around $8.6 billion in debt as it prepares for a Chapter 11 restructuring.”
All this has led to predictions of gloom and doom for the 42 teams (14 MLB, 12 NHL, and 16 NBA) aired on the RSNs, with fears Diamond may walk away from those contracts amid bankruptcy. This has reverberated throughout the leagues and teams and led MLB reportedly into thus far unsuccessful talks to negotiate some type of a buyout of the RSNs.
But how in danger are the RSN deals in bankruptcy? They are certainly substantial risks to what is a very large income stream for the teams. In the first nine months of last year, Diamond made sports rights fee payments of $1.47 billion, according to the company’s most recent quarterly report. Including the last quarter of 2022, Diamond has on its books future obligations to pay rights fees of $12.7 billion, according to the quarterly filing.
But while at first glance it might seem like the point of bankruptcy is to rip up those obligations, that’s not necessarily the case.
“Reports that Diamond will walk away from the team deals are written by those who know nothing about bankruptcy,” said one investment banker, who requested anonymity because he has done business with many of the teams that might be affected.
Put simply, unless the point of Diamond’s prospective bankruptcy is to unwind its business rather than reorganize, it will not want to lose its relationships with the teams, which are the core of the operation.
Just because Diamond declares bankruptcy (if it does) does not mean it will walk away from the media deals, said Zev Shechtman, a bankruptcy attorney with Danning, Gill, Israel & Krasnoff.
The media deals in bankruptcy parlance are known as executory contracts. Under the federal code, the debtor, in this case, Diamond, can choose to walk away from or keep them. And in some cases renegotiate, which the teams might be willing to do because their claims in a Diamond bankruptcy would be subservient to the lenders.
“That is a big piece of leverage that the debtor has to renegotiate,” Shechtman explained. “Because if they had rosy projections that this asset (the media deal) was going to be worth — let’s just call it $100 million over a period of time — and then they’ve learned that it’s only $50 million over that same period, they can renegotiate based on those new more accurate projections.”
Many of these media deals were struck before the massive decline in cable subscribers, so the teams could be faced with renegotiating with Diamond in bankruptcy or starting from scratch with new entities that recognize the old contracts are paying too much to the clubs.
In many ways, the bankruptcy experts like Shechtman say this is no different than a retail bankruptcy when say a JCPenney, depending on their economic value, walked away from some stores’ leases, kept others, and negotiated a third category. Each of the 42 teams’ media licenses with Diamond is not created equally, and so it is possible Bally’s emerges with a smaller mix of teams.
Hovering over this process are the leagues like MLB, which are sure to want to enforce boilerplate provisions common in deals like these that if Diamond declares bankruptcy, the contracts become void. But those clauses are disallowed in bankruptcy, said one attorney, who requested anonymity because his firm has clients involved in the Diamond saga.
“Bankruptcy specifically prohibits MLB or anybody else from enforcing those types of provisions,” this lawyer said. “And bankruptcy also gives the holder of the rights, Diamond, the ability to eliminate a provision that says, for example, you can’t transfer the rights without the approval of MLB or any of the other sports leagues.”
MLB has had a contentious relationship with Diamond. In 2021, MLB commissioner Rob Manfred said of a prospective streaming platform from Diamond, “We want to own and control the platform on which they’re delivered and may have partners in that process.”
And then in 2022, he said of Diamond asking MLB to sell its streaming rights, “We never received a coherent response to that, which our analysis suggested that what they were looking for from us was not going to solve their problems. Our reaction has been, why tie up additional rights in an entity that by its own admission has financial problems?”
Speculating how the actors in the RSN drama act in a potential bankruptcy all presumes Diamond wants to emerge from a Chapter 11 and not liquidate. If it does want to stay in business, it must walk a delicate road of not alienating the teams and leagues that are the core of its business.
“If their goal is to emerge from this, doing this kind of business, then burning bridges with the teams doesn’t seem to make a whole lot of sense from where we sit today,” Shechtman said. But he cautioned, “to the extent that any of these teams have relied on these income streams, they will probably be challenged in the near future, if not, already.”
(Top photo: Emilee Chinn/Getty Images)