Disney’s Hail Mary sports deal
Being a forced seller of regional sports networks may leave Disney with a losing price
As Walt Disney prepares to close on its acquisition of 21st Century Fox assets, the last act in the deal making drama is under way. This time Disney will be the seller, but getting a good price will be tricky.
Disney is trying to find a buyer for Fox’s 22 regional sports networks, which it acquired as part of the deal. The Justice Department has said that Disney, the majority owner of ESPN, needs to sell the sports networks to avoid having too much market power in athletic entertainment.
The 22 channels generate around $2 billion (U.S.) annually in earnings before interest, taxes, depreciation and amortization. The crown jewel of the group is the YES Network, which carries Yankees games and in which the Yankees have a 20% stake. It accounts for around $500 million of
the group’s total Ebitda. Together, the channels account for at least $20 billion of the $71.3 billion Fox-Disney deal, analysts estimate. That price was driven up by
the bidding war between Disney and Comcast, which took the deal from Disney’s initial bid of $52.4 billion to the sale price of $71.3 billion.
Disney is unlikely to get $20 billion. While valuable, the channels are suffering as viewers increasingly go online to watch sports, and ratings for many sports leagues are in decline. The networks may only be worth around $16 billion, according to MoffettNathanson. Even getting that will be a stretch, especially if the channels are divvied up. The Yankees have the right to take full control of YES. If it is sold separately, the value of the remaining portfolio will be considerably diminished.
Amazon.com is rumored to be among the interested buyers, or perhaps a partner for the Yankees. However, most of Amazon’s media spending has been dedicated to original scripted content and national programming like Thursday night NFL games. It would be challenged to stream regional channels on its national platform. Disney would also probably prefer not to sell to a dangerous rival like Amazon.
Private-equity firms and broadcast chains may also be interested, but the most obvious buyer is Fox itself. As Rupert Murdoch contemplates the future of New Fox, it is clear that sports are a large part of the plan. He may want the networks back. How much should he pay? “As little as humanly possible,” says Rich Greenfield of BTIG Research. “I would make Disney cry first.” Getting the networks for less than he sold them would be a brilliant win, even by Murdochian standards.
Disney Chief Executive Bob Iger needs to get a price somewhat close to what Disney paid— not only to reduce debt as Disney gears up to launch a new streaming service, but also to save face. That simply may not happen. Disney is a forced seller. For this deal, there is no fairy-tale ending.