Sports valuation bubble: pending US bankruptcy is warning to moguls

Disney’s $71bn acquisition of a trove of 21st Century Fox media assets in 2019 remains controversial. However, Disney’s Bob Iger, as a part of the transaction, made one undeniably wise choice. Fox was also seeking to unload more than 20 regional sports networks that broadcast baseball and basketball games in local markets. RSNs were a lucrative concept that Rupert Murdoch had helped pioneer.

Disney decided to pass on the RSNs. They were ultimately acquired by Sinclair Broadcast Group, which was best known as an operator of local television affiliates scattered across the US.

Sinclair went on to put the RSN’s into a separate vehicle which it named Diamond Sports. The entity was thought to be so foolproof that its $10.6bn purchase of the Fox assets was funded with just $1.4bn of common equity.

But in sports there are upsets. The pandemic first halted games and then accelerated cord-cutting. Cable and satellite businesses that were shedding subscribers could no longer justify paying sky-high rights fees to franchises and leagues.

Diamond recently announced that it is preparing a potential bankruptcy filing to deal with $8bn of debt.

Sports properties seemed to be the last remaining content category to defy price gravity. But even Disney’s ESPN is now struggling with high costs and flagging revenue. Its once dominant “linear networks” division just reported a 16 per cent quarterly drop in operating profits.

Perhaps streaming platforms — within traditional media companies or challengers — will simply take over the job of bidding up sports TV rights. But the plateauing subscriber growth of Netflix and others shows that their own economics are not that great.

The pending Diamond Sports bankruptcy comes as trophy sports franchises go up for sale around the world. These include Manchester United and the Washington Commanders. Diamond is demonstrating there is an upper bound on prices fans will pay to watch games on video. Would-be team owners should take note.