Diamond Sports Group’s Board of Managers recently voted to block parent company Sinclair’s involvement in the day-to-day operation of the Bally Sports RSNs and installed David Preschlack as its chief executive officer. The former NBC Sports Regional Sports Networks president has been tasked with fixing the company’s legacy financial issues, better enabling the business to drive long-term, sustainable value for its stakeholders. He will also work to strengthen Diamond’s relationships with rights owners and distributors and grow the company’s direct-to-consumer product, while preserving a still-viable linear TV business.
While it’s a tall order, particularly in a rapidly evolving media landscape, there are reasons to believe Preschlack can succeed. Live regional sports rights remain an incredibly valuable asset, and the creditors, Sinclair and the leagues are all motivated to figure out how to restructure Diamond’s business in a way that benefits all parties.
JWS’ Take: Sinclair Broadcast Group (SBGI) still owns Diamond Sports Group, but Diamond’s creditors now control the company; appointing Preschlack as CEO was reportedly their choice. Diamond did not have a full-time CEO prior to Preschlack’s assignment, and the creditors felt it was necessary to have someone dedicated to running the business for it to execute a restructuring and manage to come out on the other side.
Back in March, SBGI, on behalf of Diamond, dipped back into the debt market and borrowed $635 million. As part of that transaction, the creditors negotiated tighter governance over the company, including the formation of a new board that would take over management control.
The creditors chose to add Preschlack and former Fox Networks Group president and CEO Randy Freer to the new Board of Managers (Preschlack will retain his seat while serving as Diamond’s CEO). Sinclair assigned current president and CEO Chris Ripley and long-time sports executive Bob Whitsitt to board seats. Both parties agreed to give former Bell Media president and former NFL COO Maryann Turcke a seat.
Preschlack’s first order of business in the new role is cleaning up Diamond’s balance sheet. As of the end of Q3 the business had $8.74 billion worth of debt manifesting itself in large, unsustainable interest payments on an annualized basis.
In Diamond’s ideal path forward the creditors would equitize the majority of the debt, leaving a small amount on the company’s balance sheet. That would free the RSN conglomerate from the costly interest payments and allow for the EBITDA generated by the business to capably service its remaining debt and the balance of its bills.
The creditors could also choose to refinance the entirety of the business themselves or look for a third party or parties to invest and aid in the restructuring. Doing so would enable them to recoup some money and retain a portion of the debt, while someone else funds the company and runs it. Remember, creditors typically do not want to be operators.
Patrick Crakes (principal, Crakes Media) cited “Apollo Global Management and Liberty Media, among those who originally wanted these RSNs,” as investors who would potentially have an interest in buying up enough of the debt to enable a restructuring then operate the business.
Conversations between Diamond, the creditors and key stakeholders about the company’s direction are underway.
There is no guarantee the creditors, who buy debt for a living, are interested in exchanging it for Diamond equity. But if they are going to make the swap, they’ll have to buy into Preschlack’s plan for the business’ future.
The erosion of the traditional cable bundle has hurt Diamond’s margins, and the company is not going to be able to solve for the steady decline in linear subscribers facing the broader industry. However, there may be opportunities for it to forge more meaningful relationships with distributors, outside of the cable bundle, to help offset some of the lost revenue. For example, the company launched a direct-to-consumer product, Bally Sports+. While Diamond is encouraged by early subscriber adoption, D2C in its current format is not going to replace the economics lost from linear television.
Diamond can try to address pricing too. Bally Sports+ currently costs $20/mo. so it won’t compete with the linear RSNs priced to be inside of the cable bundle. But a more cooperative relationship with distributors could potentially enable the company to price its service more competitively. A cheaper price point may lead to more subs.
The company will likely need to increase its top-of-the-funnel activity and draw the casual sports fan to meaningfully grow its subscriber count. Diamond believes it must deliver a direct-to-consumer experience that becomes a routine part of people’s day. The company has talked about building an integrated digital platform that allows fans to get everything from live game broadcasts to tickets and merchandise in the same location.
Diamond needs to establish strong partnerships with multi-channel distributors to pull that off. It also needs to stabilize and enhance its relationships with key partners, namely Major League Baseball. As it stands, the company still does not have the rights to nine of the MLB 14 teams it does business with. Preschlack’s strong relationships with the leagues is believed to be among the reasons he was selected as CEO.
The D2C sports streaming products in the market today do not provide consumers with enough bang for the buck to achieve mass adoption. To deliver more value, the company will need to build off its current digital rights profile with all three of the pro leagues while securing the cooperation of current pay-TV partners.
Of course, having long-term control over their digital rights is a critical piece to getting the existing creditors—and any potentially new investors—to buy into Diamond’s vision for the future. “As long as you have the rights, the business has something of value regardless of how badly the plan goes,” Crakes said.
The leagues seem to understand they need the RSNs. Their local broadcasts still need a platform to air on, local rights generate a meaningful percentage of club revenues and it has become obvious that standalone D2C is not a viable solution at this time. Crakes expects the NBA, NHL and MLB to cooperate in the restructuring process and to gain equity in Diamond as part of the process.
