The deal boosts the cable presence of Sinclair, one of the largest broadcast station owners.
Sinclair said it already had agreements in hand that will boost Tennis Channel’s distribution from 30 million to 50 million subscribers within a year of closing. Sinclair estimates that the revenue from the increased number of subscribers plus the higher advertising revenue from having higher viewership should increase cash flow by $60 million.
With its vast size and big retransmission consent deals pending with Comcast and other large operators, Sinclair said it expects to be able to push Tennis Channel's subscriber count higher. As an independent, venture capital owned cable network gaining distribution was Tennis Channel's primary difficulty.
Tennis Channel had about $200 million in net operating losses dating back to its start up. Sinclair will take advantage of the tax benefits from those losses to reduce its own future payments to the government. Sinclair figures those benefits are worth about $65 million. The network has run at a profit for several years, said Tennis Channel CEO Kenny Solomon, who will be staying with the network along with most of the current management team.
“Tennis Channel is an established property with high-quality content and advertisers, and is vastly under-compensated and under-distributed relative to the value it brings to its viewers. It was the only independently-owned major sports network left, and we knew we could unlock value through a tuck-in acquisition,” said David Smith, president CEO of Sinclair.
“The additional subscriber base, which has already been contracted, equates to the creation of approximately $200 million of incremental value at closing. Furthermore, we expect this combination to create additional linear and OTT viewership and advertising growth, and we have the added benefit of continued involvement of Ken Solomon, CEO of Tennis Channel, and a seasoned programming executive," Smith said.
On a conference call, Sinclair executive VP Barry Frber said that while the station business remains a good one, it is getting tougher. As a result Sinclair was looking to move into content.
“We wanted to take control of our destiny by doing more of our programming, and owning cable channels was part of going down that path,” Faber said.
When Sinclair acquired Allbritton, in addition to TV stations, the assets included a News 8, a local cable news channel in Washington. Faber said that Sinclair has invested in the channel but plans to keep it local.
The Tennis Channel was a good fit for Sinclair because sports has a unique appeal and the network was “under-distributed in terms of the quality of programming they present,” he said.
In recent retransmission negotiations with cable operators, Sinclair has sounded off about whether building or buying a cable network would be a more attractive proposition. During some of those negotiations, operators agreed to carry a Sinclair cable channel as part of their retrains deal.
That strategy became public when talks reached an impasse with Dish Network. Dish called out Sinclair for making unreasonable demands, including payments for a cable network Sinclair might or might not own.
Analyst Marci Ryvicker of Wells Fargo said the transaction “makes strategic and financial sense and proves how differentiated Sinclair is vs. its broadcast peers.”
Ryvicker endorsed Sinclair’s continued investment in content. “We believe the company's diversification into other types of TV networks via this cable deal, and its previously announced digital networks of American Sports Network and Comet are great strategic moves for continued financial growth,” she said in a note after the deal was announced Wednesday.
For the Tennis Channel, finding a buyer was inevitable. “It’s pretty clear that our existing and founding investors had patience that many people were right to question,” said Solomon. “They have been very generous in giving us time to build the asset as an independent in an ever-changing universe that isn't always friendly to independents.”
Tennis Channel needed to find the right buyer, he said, one that could bring strategic resources that could bring the Tennis Channel to the next level.
In the meantime, Tennis Channel invested beyond its size in terms of distribution but acquiring rights to a 30-million subscriber network shouldn’t have an impact, hiring big time talent and building apps and OTT platforms before larger networks did, Solomon said.
“We over-built the product so that when we flipped the switch, the value would be there not just for whoever would be our partner/owner, but for the distributors, so they would embrace it,” Solomon said.
Tennis Channel is in litigation with Comcast over the tiers on which it is carried. Tennis Channel contends that sports channels that are owned by Comcast are given preferential treatment. Solomon said the suit remains in effect, but noted that Comcast is also one of Tennis Channel’s major distributors.
As Sinclair negotiates with Comcast, settling that lawsuit could become a bargaining chip.
Cable channels are under pressure because cord cutting is hurting subscriber fee revenue growth. But Faber said Sinclair believes Tennis Channel has a strong OTT strategy with its Tennis Plus product. And unlike fully distributed channels that have nowhere to go but down in terms of subscribers, there is plenty of room to grow Tennis Channel subs, even in a cord-cutting and cord shaving environment.