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Should Bally’s Sports Kansas City parent company go bankrupt, what does that mean for the Royals?

Diamond Sports Group, the wholly owned subsidiary of Sinclair Broadcasting that operates Bally Sports Kansas City, missed a $140 million interest payment last week, triggering a 30-day grace period that will almost certainly herald a bankruptcy filing. Diamond Sports owns and operates 19 Bally-branded Regional Sports Networks (RSNs), 14 of which own the rights to broadcast MLB teams, as well as a minority stake in two additional baseball RSNs in Marquee Sports for the Cubs and YES Network for the Yankees.

The potential bankruptcy filing for a company that bought these nets for $10 billion in 2019 sent shockwaves through the industry and caused concern in baseball. Let’s talk about what’s going on and how it affects the Royals.

Why is Diamond Sports going bankrupt?

Royals fans’ first reaction to the potential bankruptcy of Diamond Sports might be “I’m not kidding you fool, you haven’t made the games available to spectators!” Royals fans are no doubt frustrated with the company’s tough negotiating stance with streaming providers which has resulted in Bally Sports Kansas City being dropped by YouTubeTV, SlingTV, and the DISH Network.

It didn’t help that Diamond Sports made it difficult to watch games, or that they bought these networks just before a pandemic, or that, by a conservative estimate, cable is losing 5% of its customer base every year. Bally Sports launched a direct-to-consumer streaming option last summer for $19.99 a month. But baseball refused to transfer all streaming rights to Bally’s, and the service known as Bally Sports+ was only available in select markets (including Kansas City).

Despite these hurdles, this has been a profitable business in 2021 and 2022. As Fangraphs’ Ben Clemens points out, “this failure has to do with debt service, not a catastrophic corporate failure.”

Sinclair wanted to be a major player in the broadcast, so he took on $8.6 billion in debt to buy RSN from Disney. The purchase boosted share prices by 15% as CEO Chris Ripley dreamed of integrating sports gambling with their broadcasting. But the profits weren’t profitable enough. Diamond Sports – which was created to keep RSNs at arm’s length from Sinclair, perhaps an indication that they knew how risky this venture would be – is too encumbered with debt to dig out of their hole.

Perhaps if they could find a way to strike deals with streaming managers that could soften the blow. The pandemic certainly hasn’t helped. It also didn’t help that Sinclair authorized about $1.8 billion in stock buybacks, money that could have been used to pay down their subsidiary’s massive debt. But Clemens writes that “in a sense, this failure was foreordained.”

What happens next with Bally Sports Kansas City?

Now that they’ve skipped interest payments, Diamond Sports will have to undergo an $8.6 billion debt restructuring that will likely leave major lenders — firms like Prudential Financial, Fidelity, Hein Park Capital Management and Mudrick Capital Management — as new owners. . They don’t do sports broadcasting, so they will likely sell the RSNs to a buyer. Disney was forced to sell the RSNs to get their takeover of Twenty-First Century Fox approved by the Justice Department, so don’t expect them to buy back the RSNs.

A potential bankruptcy filing allows existing TV contracts to be restructured or canceled. MLB would have the leverage to work out a new deal: If Diamond Sports can’t secure the broadcast rights, it’s essentially useless. Baseball may be involved as an equity investor in what emerges from the bankruptcy. Diamond Sports tried to stay afloat last fall by bringing in the MLB, NBA and NHL as equity partners. Baseball recently hired former Sinclair and Fox Sports executive Billy Chambers, creating for him a new position of executive vice president for local media, a clear sign that they will have a bigger role in local distribution of games.

So will Royals games be televised?

Diamond Sports is due to make payments to teams in the first quarter, and with $1.8 billion owed to teams this year and just $585 million in cash, it seems unlikely they will meet all of their obligations. If Diamond Sports loses its payment, MLB could take back the media rights. Commissioner Rob Manfred said baseball would do just that to make sure games get broadcast.

“We’ve been really clear that if Diamond doesn’t pay, under each of the broadcasting deals, that creates a right of termination and our clubs will proceed to terminate those contracts. In case MLB steps in, what we would be doing is producing the games, we would be making use of our asset, the MLB Network, to do that. We went directly to the distributors, which is Comcast, Charter, the big distributors, and we made a deal to distribute those games on cable networks.

“We would also look for flexibility on the digital side, so that when you watch MLB.tv, you come in, you can buy your package off-market like you always have, but you would have the ability to buy in-market games, which I see as a huge improvement for the fans.

MLB could add local rights as part of its MLB Network and MLBTV packages without blackout restrictions, or help teams produce their own local broadcast options. In the long run, they could also resell their rights to another bidder, perhaps a more preferable option due to the revenue they could generate from a bidding war.

Could baseball sell all of its content on a streaming platform, like MLS recently did with Apple TV? This could be the future of sports TV, according to Greg Bouris, director of the undergraduate sports management program at Adelphi University:

“Unless a direct model has a guarantee, at a team level, the thought is, ‘If it’s not RSN, it’s going to be Amazon, a Hulu.'”

MLB has already begun looking into this model that would combine local rights with its out-of-market Extra Innings package with no blackout restrictions. But right now the local streaming market is fragmented. Diamond Sports holds the rights to less than half of the league, with other teams committed to local television deals that will extend beyond the next decade. MLB would need to secure those local rights in order to provide a platform. That might be a goal down the road, but it’s not an option yet.

As for the Royals, they seem confident the games will air as scheduled.

“MLB has been focused on this,” the Royals said in a written statement about Bally’s financial woes, “and has a number of contingencies in place to make sure fans have access to our games. We have had numerous conversations with MLB and there is no higher priority.”

Too many parties have invested too much money in airing baseball for the games to not air.

Will this affect Royals players’ payroll?

It’s possible that this year’s restructured TV deals will reduce payouts in the near future in exchange for higher payouts down the road or an equity stake. Manfred admitted that MLB would not be able to replace 100 percent of local revenue owed to teams in the short term.

Right now the Royals get about $48-52 million annually from Bally Sports Kansas City in a deal that was signed in 2020 and was expected to last 6-8 years. If MLB takes back the rights, those Royals broadcasting rights could be resold to another bidder, but after years of losing, the Royals may not be as good a position as other teams to command a high price.

But remember, 48 percent of local revenue is split evenly. So even if the Royals suffer some success, it’s somewhat mitigated if other teams do better in the new TV deals. That could still leave the Royals in a worse shape than the rest of the league, but the ownership group won’t necessarily be in the poorhouse.

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