Fox RSN auction hits 1st-round snag as MLB presses bankers on digital rights pitch

Disney and its investment bankers are preparing for the second round of their auction of nearly two dozen of Fox’s regional sports networks and hoping it goes better than the first.

The first round of the bidding process for the so-called RSNs — networks that Disney bought and must unload in the aftermath of its $71 billion deal to purchase 21st Century Fox’s entertainment assets — ended in the second week in November and it was met with a significant degree of confusion as to what potential acquirers would be getting if they bought any or all of the RSNs, according to people with direct knowledge of the matter.

Another area of confusion involves Amazon’s reported interest in buying all 22 of the properties, and most recently whether Major League Baseball (MLB) will enter the bidding contest, the FOX Business Network has learned.

People directly involved in the process say Amazon did not place a formal, first round bid for all the RSNs but may ultimately do so while it negotiates for a stake in the Yankees Entertainment Network (YES), another of the properties involved in the auction. These people also say MLB is examining a possible formal bid, but no decision has been made.

Spokesmen for Amazon and MLB declined to comment on this matter.

The auction is an outgrowth of one of the biggest media deals in recent memory, the sale of the Fox assets to Disney (the entire company, except Fox News, FOX Business, Fox Sports, Fox TV Network and its owned and operated affiliates). The deal received U.S. antitrust approval on the grounds that Disney unload the RSNs because of its overlapping ownership of sports channel ESPN.

The RSNs feature a variety of sports programming in various regional markets, mainly in the South and Midwest that are offered through various local cable operators. The second round of the auction by bankers at Allen & Co. and JP Morgan is currently underway and expected to conclude in late 2018 or early 2019, these people add.

But the auction got off to a rocky start, various participants told FOX Business. As the bids came into Disney’s bankers, several interested parties were under the impression that with the purchase of the RSN came full ownership of digital rights to MLB games.

MLB Commissioner Rob Manfred then took the unusual step of inserting himself in the multi-billion-dollar auction process, telling bankers in charge that they need to alert potential buyers that any purchase of these entities doesn’t include digital rights to baseball games that remain the property of the leagues and its teams — a move that could lower the price of the networks as the auction process proceeds, according to four people with direct knowledge of the matter.

How some of the bidders came to believe they would own, rather than lease from the league and the teams those rights and baseball’s response has not been reported. The reason for the confusion is unclear. Bankers didn’t “drill down” on the exact nature of the digital rights in conversations with potential buyers in the first round of the bidding process but planned to do so later, said one person with direct knowledge of the matter.

In addition, many of the initial bidders are novices in the arcane world of sports-rights ownership, and how the league and its teams allow regional networks to stream games on mobile devices and the internet.

Also unclear is how many outfits bid on the entire package of 22 RSNs other than Sinclair Broadcasting, a regional television operator that recently made news by having its attempt to purchase Tribune Media thwarted by government regulators, these people add. Other interested parties in some or all the RSNs include private equity houses like Apollo Global Management, and Amazon. 21st Century Fox, the parent company of FOX Business, did not bid in the first round but may do so later, these people say (a Fox spokeswoman had no comment).

In any event, the first round bids were said to be “non-binding,” and bankers at Allen & Co., have now amended their pitches to bidders as the second round proceeds, according to people with direct knowledge of the matter.

An MLB spokesman confirmed Manfred’s actions in claryfing the description of the digital rights ownership issue during the first-round of bidding.

“We have been in communication with Allen & Co. about digital rights throughout the process. There is no misunderstanding about who owns the rights and there is no issue between Allen & Co. and MLB,” the spokesman said in a statement to FOX Business.

A spokeswoman for Allen & Co. and a spokesman for JP Morgan had no comment.

Another area of confusion involves Amazon’s interest in all 22 properties that are for sale. On paper, the auction includes 21 RSNs, plus the Yankees Entertainment Network, which airs New York Yankee games and those of the Brooklyn Nets. Fox had been the majority owner of YES, with the Yankees owning a 20 percent stake, but under the terms of their agreement, the Yankees can repurchase Fox’s share of YES under a change of control provision.

The Yankees alerted Disney and its bankers that it plans to buy back the 80 percent of YES that it doesn’t directly own, and it’s doing that by cobbling together a consortium of investors that include Amazon, according to people with direct knowledge of the matter. As of now it’s unclear what member of the consortium would hold a majority stake, these people say.

The partnership of the Yankees and Amazon could allow Amazon to stream Yankees games on its Amazon Prime subscription service, but initial press reports cited Amazon as a first-round bidder on all the RSNs as well as YES — signifying a major new corporate strategy for the online retail giant as it seeks to develop more sports programming (Amazon already streams Thursday Night Football).

But people with direct knowledge of the process say Amazon is only weighing a larger bid for the other RSNs that may come as the second round prorgresses while it is atively negotiating with the Yankees. One reason that Amazon may scale back its ambitions is that its CEO Jeff Bezos may want proceed cautiously in a business that he’s relatively new at, according to a person with knowledge of the matter. A spokesman for Amazon didn’t return calls for comment. A spokesman for the Yankees didn’t return a call for comment.

Adding another dimension of confusion to the auction drama is one of the latest possible entrants to the bidding contest: Major League Baseball. Amid the brouhaha over digital rights, MLB began an internal discussion as to whether it too should bid on the RSNs, the FOX Business Network has learned.

MLB already has its own national sports network, but the RSN purchase would be interesting. Currently, baseball teams get paid a rights fee by the RSNs to air and stream locally games of 15 of the 30 major league baseball franchises. With the deal, the league and its teams would no longer receive those fees, but it would receive advertising revenue and subscriber fees for the local broadcasting rights.

A person with direct knowledge of MLB’s thinking said while no final decision on a bid has been made, “The league fully understands the value of owning the RSN.”

Some on Wall Street have estimated the value of all the RSNs at around $20 billion — but that also includes YES, which will likely be sold separately. Other factors may also depress the sales price including the trend of millennials and others “cutting the cord” or dropping their cable subscriptions. With that, some baseball executives say the final price tag of the sale may value the RSN’s at just $10 billion.

The confusion over who owns digital rights might is also weighing on the RSN price as the bidding continues. For instance, under the current deal between MLB and Fox, people with cable subscriptions can opt to stream games in their local markets via licensing agreements between the team with the various RSNs. But those licensing agreements are subject to change, and a recent deal between MLB and Fox allows various teams to keep their current streaming license (that could last for years) or renegotiate the terms of the deal directly with the RSNs.

These negotiations are ongoing and it’s unclear how many teams have “opted in” for the MLB-Fox deal and how many will choose in the coming months to renegotiate with the eventual owners of the RSNs.

An additional complicating factor includes national digital rights that allow over-the-top (OTT) digital viewing for consumers who have decided to ditch their cable subscriptions. These digital rights are considered by league officials to be even more valuable than the in-market digital rights because OTT viewership is considered to have greater potential with younger viewers, league executives tell FBN.