Thursday, July 21, 2011

Why Fox Slums With Frank McCourt

I know that the Dodgers are important to Fox, reflected in their huge cash-advancing television-rights-securing deal that they had extended to Frank McCourt prior to MLB's rejection of the deal. But as Andy Lewis of the Hollywood Reporter wrote this week (no link), a competitive auction not only threatens to hurt Fox in Los Angeles, but also destroy the "crown jewel" among Fox's regional sports networks:

Like a forgotten child, Fox Sports stands to be the big collateral loser in the bitter divorce between Frank and Jamie McCourt, which morphed into a battle between Frank and Major League Baseball over ownership of the Los Angeles Dodgers. Fox's sweetheart deal for Dodger TV rights until 2027 -- agreed to in April as McCourt struggled for cash to make the team's payroll and fund a big payoff to Jamie -- could come crashing down July 20 if a Delaware bankruptcy judge forces the Dodgers to auction the rights to the highest bidder. This comes as regional sports networks (RSNs) like Fox's Prime Ticket have emerged as lifelines for companies trying to stem the exodus of audiences to online viewing. An auction could be a windfall for the Dodgers but a big blow to Fox Sports' lucrative dominance of the L.A. cable sports market.

Since 1993, Fox Sports has used control of the Dodgers' TV rights to make Fox Sports West the crown jewel of its 17 RSNs and help squeeze out any competitors. In fact, Fox bought the team that year to block Disney from using Dodger games as the centerpiece of a proposed ESPN West RSN, and it sold the team to McCourt in 2004 for a reported $430 million because he was willing to extend Fox's TV deal for a decade. With that move, Fox Sports controlled rights to all six major L.A.-area pro teams.

Even after having loaned McCourt millions of dollars to buy the team, accepting an overvalued Boston parking lot in payment for one loan and rebating $50 million of the original purchase price, Fox came out ahead on the sale of the Dodgers because it retained the TV rights. But now its rivals are hovering -- Time Warner in particular, having lured the Lakers from Fox by offering them joint ownership of two channels in a deal starting in 2012 rumored to be worth as much as $3 billion over 20 years.

Contrast that with the roughly $33 million a year Fox now pays the Dodgers. Forbes estimates Prime Ticket had about $130 million in earnings in 2010 and that the Dodgers' presence increases the market value of Prime Ticket by hundreds of millions -- if not billions -- of dollars. A conservative estimate of Prime Ticket's value might be 15 to 20 times cash flow, or between $2 billion and $2.5 billion. (YES, the New York Yankees' cable network widely considered the most valuable RSN in baseball, is estimated to be worth about $3.4 billion.)

But the Dodgers bankruptcy threatens Fox's golden goose. Since buying the team in 2004, McCourt has loaded the team with even more debt (more than $450 million by most estimates), and some say he used the team as his personal checking account. The Los Angeles Times puts McCourt's withdrawals for personal expenses at $108 million, at least. A recent Vanity Fair article detailed his spending: from the $79 million in homes to the flying time on NetJets to a hairdresser retainer of $10,000 a month. During the past year, McCourt has struggled to meet the Dodgers' operating expenses and cover his debt payments at the same time. And when his divorce battle with Jamie concludes, he might have to pay her as much as $400 million. Alarmed, MLB moved to take over the team.

But McCourt surprised everyone by negotiating the April deal with Fox, now in jeopardy, that replaced the final three years of the current contract (2010-13) with a 17-year extension valued at $3 billion (McCourt's estimate) or $1.7 billion (baseball's estimate) and gave McCourt a 35 percent ownership stake in Prime Ticket. For McCourt, the most important part of the new deal was an immediate cash advance of $385 million, of which $211 million would go for baseball operations and $174 million would go to the McCourt family -- broken down across various obligations and including $5 million each to Frank and Jamie for spending money.

Some say the deal discounted the long-term value of the Dodgers' TV rights by as much as 20 percent because the Yankees receive in the neighborhood of $200 million a year from YES, and even the Texas Rangers -- with little of the cachet or fan appeal of the Dodgers -- get $80 million a year for their TV rights.

When MLB commissioner Bud Selig rejected the new deal, McCourt put the Dodgers in bankruptcy in the hope that the court would force Selig to approve. Although most people with knowledge of baseball's rules and bankruptcy law think this gambit will fail because of the commissioner's mandate to act "in the best interests of baseball," the future of the team's TV rights is up in the air. At the July 20 bankruptcy hearing, Judge Kevin Gross could require McCourt to hold a competitive auction for the rights. (A bigger contract won't ease McCourt's personal financial woes; neither Gross nor MLB is likely to sign off on any deal that diverts money to pay for his divorce.)

Certainly, a competitive auction is bad for Fox Sports. At best, the company would be forced to pay higher rights fees to keep the Dodgers. At worst, it could lose the rights. If Fox loses the Dodgers, it would leave a gaping hole in Prime Ticket's summer lineup at the same time a formidable new challenger has been created, dramatically reducing the value of the company's most valuable RSN.

But what is potentially bad for Fox might ultimately be good for Dodger fans. The new owners -- and there probably will be new owners by next season -- will have hundreds of millions in new TV money to spend on improving the team. Let's just hope they don't have the McCourts' taste in real estate, private jets and hairdressers.

The Rangers get $80M a year for television rights, and Fox only pays the Dodgers $33M? Man, that is undervalued.


Fred's Brim said...

Fox, Frank, slums and now I get banner ads for Zubaz pants. How low can we go?

Greg Hao said...

There are lots of moving parts here; we don't know how many games Fox is paying the Rangers for those $80MM, don't forget, KCAL pays the Dodgers about $1.2MM/month for their allocation of games.

And again, as the HR story highlights, this $30MM was signed in 2004 and all the time we KNOW that $30MM under values the Dodgers because that was part of the cost to McCourt of buying the Dodgers from Fox with Fox's money.

Steve Sax said...

But if baseball's estimate is right and it's $1.7B over twenty years, that straight lines to only $85M/year. Hard to tell what the impact on the NPV is though without considering the cash flows by year, but I'm assuming the $385M immediate advance is a big piece of that value, and the out-years are relatively undervalued as a result.

dsheridan88 said...

If baseball's estimate is right...
Why is every outlet reporting 3 billion, not 1.7?
If you do the math on 17 years into 3 billion, less the initial 385, it comes out to 153 mil. per year.
Isn't it hard to argue that the New York rights should generate more than LA based on market size?
There is a serious lack of vigorous reporting about TV rights as well.... There is not one piece of real analysis of the proposed deal that I have been able to find. The media can't put down their torches and pitchforks long enough to evaluate Bud's claims. Why is he all of a sudden so trustworthy?

dsheridan88 said...

Correction: Meant to ask "shouldn't NY rights be worth more"?

rbnlaw said...

After reading that, I need a shower.

Well, I did just get back from the gym.

(the place where people lift heavy shit and run like hamsters on a sidewalk that doesn't stop. . .just so DB knows)