Last week, we discussed the challenges for Sinclair at the Fox-branded regional sports networks they bought from Disney in 2019, including a potential bondholder-led debt restructuring and one analyst (Steven Cahall of Wells Fargo Securities) calling the RSNs “Sinclair’s Achilles heel” and saying that they should be spun off. Well, Sinclair’s third-quarter results further illustrate the issues there, as the company took a $4.23 billion charge “related mostly to the regional sports networks business” (which is under their subsidiary, Diamond Sports Group) and posted a $3.21 billion loss for the quarter. Here’s more on that from Georg Szalai and Etan Vlessing of The Hollywood Reporter:
Quarterly revenue increased 37 percent to $1.54 billion, “with gains driven in large part by the company’s acquisition of 21 regional sports networks and Fox College Sports” in August 2019 from the Walt Disney Co. and the higher political ad revenue.
Sinclair posted a third-quarter operating loss of $4.18 billion, which included the impairment charge “taken on the Local Sports segment relating to goodwill and definite-lived intangible assets, and $13 million of non-recurring costs for transaction, COVID, legal, litigation, and regulatory costs.” Excluding adjustments, operating income of $61 million fell $147 million from the third quarter of 2019. The Local Sports unit consists primarily of the regional sports networks, the Marquee sports channel, and a 20 percent stake in the YES Network.
The firm posted a quarterly loss of $3.21 billion, compared with a year-ago loss of $60 million. Excluding adjustments, the company recorded earnings of $161 million.
That piece goes on to mention that the impairment charge “was caused by falling distribution revenue due to the loss of two virtual distributors, YouTube and Hulu, that combined amounted to around 10 percent of gross distribution revenue for the regional sport networks, as well as higher subscriber churn.” And it’s certainly interesting to read exactly how much of an impact those drops from YouTube TV (at the end of September) and Hulu+Live TV (in October) had. It’s also worth keeping in mind that the temporary deal YouTube TV struck in March to keep those networks tightened who could get which networks, so some distribution was lost even before the full drop in September.
This charge and this quarterly loss are certainly concerning, especially as this came amidst higher political ad revenue thanks to the election. However, it’s worth noting that the distribution issues in particular may get better in time, as the majority of the sports these networks rely on currently aren’t playing (and RSNs rely on live games even more than other cable sports networks do). In a normal year without COVID-19 schedule shifts, many of these RSNs would have NBA or NHL regular-season games right now; those leagues currently seem unlikely to start their new seasons until late December or January. And distribution issues often go right down to the wire ahead of when a network has important live games coming up. So the situation here could look better in a few months, and it might look better still as we get closer to MLB’s 2021 Opening Day on April 1.
Still, these financial numbers are more bad news for Sinclair’s RSNs, and they illustrate the magnitude of the challenges they’re facing. And the pandemic hit RSNs particularly hard, with missed games not only hurting their audience and advertising numbers, but also their net fees (as they had to pay more in rebates to distributors than they got back in refunds for unplayed games). So for the moment, at least, these RSNs aren’t looking all that great for Sinclair. But we’ll see if the “Achilles’ heel” part comes true.