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Morningstar | Disney Sells Fox Sports Networks to Sinclair; Focus Remains on Integrating Fox Entertainment Assets

Walt Disney announced the sale of the 21 regional sports networks it acquired in the Twenty-First Century Fox transaction to Sinclair Broadcasting for $9.6 billion. Disney was required to sell the stations within 90 days of the closing of the Fox transaction as part of the consent decree with the U.S. Department of Justice. While the price of the deal is lower than we had expected, the difference does not change our positive view about the deal or the impact of the Fox entertainment assets on Disney. The focus at Disney will be squarely on the integration and monetization of the Fox assets. We are maintaining our wide moat rating and $130 fair value estimate.

We believe that the lack of bidding interest in the regional sports networks from a number of media firms is due to the structural issues with the networks. While the concept of a sports rights bubble for the major sports continues to float around the investor community, we think any bubble in local rights has been steadily deflating over the past couple of years. During the early part of the decade, cable companies bid excessively on a handful of rights deals, notably in Los Angeles and Houston, and subsequent performance has suffered as these networks struggled to get carriage deals.

While the Fox regional sports networks carry multiple sports, all RSNs depend on the performance of a small number of local teams. If the teams are not performing well, interest and ratings decline with larger sustained declines for teams with long-term performance issues. National sports broadcasters like ESPN also deal with ebbs and flows, but they benefit from the overall popularity of each sport and can weather any one team’s demise. The national deals can also confer rights to leaguewide highlights or exclusive footage, which ESPN or Fox Sports 1 use to populate their news shows or league-specific programming.

We think some bidders were deterred by the lack of streaming rights, particularly out-of-market ones, held by the Fox RSNs. These rights are generally held by the leagues themselves, which package all out-of-market streaming rights to resell directly to consumers. Given the long-term possibility for video content to move to a DTC model, some bidders were surprised by the RSNs' lack of digital rights.

Another issue is that some teams with larger and more fanatical fan bases are increasingly looking to own their channel or take a larger percentage of a new RSN. One example of this is the Chicago Cubs, which recently reached a deal to partner with Sinclair to launch a single-sport RSN in 2020. The other Chicago teams (White Sox, Bulls, and Blackhawks) all renewed their deals with NBC Sports Chicago, the incumbent RSN for the market. The lack of uncertainty on the long-term ability of the RSNs to hold on to their teams has also damped the bidding, in our opinion.