HHP: MASN/Nats/Orioles case (Inside the Courtroom)

[BradyBunch]

Help me understand. In terms of damages then, are the Orioles arguing that if they were to sell their $1B franchise, they could only get $200M because of this business over 4 years of rights fees?

No, Orioles are arguing their multiple would decrease thus harming the value on the margins. MASN as an asset is worth $1b today. But future profit margins would decrease thus future value based on multiples would decline as well. Something to show what I mean..

RSN #1 valued at $1b today based on assets. It has a 20% profit margin. Profit is $60m.

RSN #2 valued at $1b today based on assets. It has a 5% profit margin. Profit is $ $15m.

RSN #1 would have a value based on multiple of $900m

RSN #2 would have a value based on multiple of $225m

RSN #1 would be more valuable then RSN #2 when all is said and done because of the profit margin. So when its up for sale due to death or for giggles.. Being RSN #1 is a position you want to be in. You don't want to be RSN #2.

[TonySoprano]

No, Orioles are arguing their multiple would decrease thus harming the value on the margins. MASN as an asset is worth $1b today. But future profit margins would decrease thus future value based on multiples would decline as well. Something to show what I mean..

RSN #1 valued at $1b today based on assets. It has a 20% profit margin. Profit is $60m.

RSN #2 valued at $1b today based on assets. It has a 5% profit margin. Profit is $ $15m.

RSN #1 would have a value based on multiple of $900m

RSN #2 would have a value based on multiple of $225m

RSN #1 would be more valuable then RSN #2 when all is said and done because of the profit margin. So when its up for sale due to death or for giggles.. Being RSN #1 is a position you want to be in. You don't want to be RSN #2.

How does having $45M less in profit in a given year reduce it's net worth $675M. I get that you are using a multiple of 15 but I look at it from an equity standpoint. If I owned a company, and in that year had less profit, the value of my asset is still what I would expect to get in a sale less liabilities.

[weams]

How does having $45M less in profit in a given year reduce it's net worth $675M.

Yeah. I am confused there.

[BradyBunch]

How does having $45M less in profit in a given year reduce it's net worth $675M.

15 multiple (which is a valuation metrics standard so to speak).

[TonySoprano]

15 multiple (which is a valuation metrics standard so to speak).

I appreciate I edited my post after you were already working on a response. So again, If I owned a company, and in that year had less profit, the value of my asset is still what I would expect to get in a sale less liabilities. Is this not true?

[Can_of_corn]

I appreciate I edited my post after you were already working on a response. So again, If I owned a company, and in that year had less profit, the value of my asset is still what I would expect to get in a sale less liabilities. Is this not true?

It isn't as if MASN has any intrinsic value beyond what it makes airing programing. If you spend 1B on it it will be for the 20% profit margin. Why would anyone spend 1B for a 5% profit margin?

[BradyBunch]

I appreciate I edited my post after you were already working on a response. So again, If I owned a company, and in that year had less profit, the value of my asset is still what I would expect to get in a sale less liabilities. Is this not true?

Yes, plus potential earnings (profit) over certain period. To give you real life example. Comcast-Time Warner deal. Comcast made a bid of $45.2 billion. Time Warner's total equity (asset-liabilities) is $29b and has a net profit of US$ 3.691b. So Comcast has figured over the next 5 years that it will recoup the $45.2 billion. In the example I gave you.. RSN #1 could command $1.9b buyout, RSN #2 could only command a $1.25b buyout. Hence the loss in value MASN is claiming.

[BradyBunch]

It isn't as if MASN has any intrinsic value beyond what it makes airing programing. If you spend 1B on it it will be for the 20% profit margin. Why would anyone spend 1B for a 5% profit margin?

MASN has the value of assets. Those assets being Orioles and Nats tv rights which is a revenue source even after paying fees because it brings viewership, ad revenue and commands a subscribers.

[TonySoprano]

Yes, plus potential earnings (profit) over certain period. To give you real life example. Comcast-Time Warner deal. Comcast made a bid of $45.2 billion. Time Warner's total equity (asset-liabilities) is $29b and has a net profit of US$ 3.691b. So Comcast has figured over the next 5 years that it will recoup the $45.2 billion. In the example I gave you.. RSN #1 could command $1.9b buyout, RSN #2 could only command a $1.25b buyout. Hence the loss in value MASN is claiming.

I still keep coming back to the fact this is about profits only over a four year period. Are we to assume long term revenues will grow atonly the same percentage rate as the rights fees paid? Aren't the amount of rights fees supposed to be linked to ongoing market rates instead of escalating to meet whatever profit level that is desired?

[Frobby]

I still keep coming back to the fact this is about profits only over a four year period. Are we to assume long term revenues will grow atonly the same percentage rate as the rights fees paid? Aren't the amount of rights fees supposed to be linked to ongoing market rates instead of escalating to meet whatever profit level that is desired?

It's because of the rationale of the RSDC decision. MASN contended they were locked into a 20% profit forever because they say Bortz's "established methodology" used 20%. The RSDC says they are not locked in to 20%. If that's true in this five year cycle, it's true forever. The 5% the RSDC set for these five years isn't locked in stone forever, but there's certainly no automatic 20% and the onus would be on MASN to convince the RSDC why the 5% they said was fair this time should be changed.

[BradyBunch]

I still keep coming back to the fact this is about profits only over a four year period. Are we to assume long term revenues will grow atonly the same percentage rate as the rights fees paid? Aren't the amount of rights fees supposed to be linked to ongoing market rates instead of escalating to meet whatever profit level that is desired?

It's a 5 year period. Resets don't apply til the next season, so next reset is 2016, but payout starts 2017. So it's 5 years.

Long Term revenues are pretty much fixed when it comes to TV over periods unless population growth in the area. Broadcast companies (MASN) sign deals in year periods. When the next reset for them comes up with Comcast, that shift will take place into higher margins but those margins as the length of the tv rights fee increase will decline. Typically you want to see 20% profit margin of 5 year period. So when the Orioles are pissed about 5%, that's because the 5% is the average over 5 years. That 15% loss of profit margin hits the Orioles bottom line as they receive 85% of the profit right now. Nat's don't care because they are getting a net gain.

[TonySoprano]

It's because of the rationale of the RSDC decision. MASN contended they were locked into a 20% profit forever because they say Bortz's "established methodology" used 20%. The RSDC says they are not locked in to 20%. If that's true in this five year cycle, it's true forever. The 5% the RSDC set for these five years isn't locked in stone forever, but there's certainly no automatic 20% and the onus would be on MASN to convince the RSDC why the 5% they said was fair this time should be changed.

Let's overly simplify this then. MASN has revenues of $100M and the only expenses are the rights fees paid $40M to each team leaving a 20% profit. The market rate says each team should have been paid $47.5 each leaving behind a 5% profit. In 10 years, MASN has greatly increased revenues to $300M. Is one model saying each team should then be paid $120M leaving behind the same 20% profit? What if that was too much when compared with other markets? Are profits not allowed to vary from year to year or at least from one contract period to the next?

[Frobby]

Let's overly simplify this then. MASN has revenues of $100M and the only expenses are the rights fees paid $40M to each team leaving a 20% profit. The market rate says each team should have been paid $47.5 each leaving behind a 5% profit. In 10 years, MASN has greatly increased revenues to $300M. Is one model saying each team should then be paid $120M leaving behind the same 20% profit? What if that was too much when compared with other markets? Are profits not allowed to vary from year to year or at least from one contract period to the next?

Gotta go to sleep now, but both models basically start by making a projection of net revenue (excluding rights fees) for the five year period. In MASN's model, you then build in a 20% profit based on those projections, and set the rights fees so there will be 20% profit left over once rights fees are paid. In the RSDC model, you decide what is a fair market profit rate (this time, 5%). Five percent is not guaranteed in future resets, but someone would have to show that market conditions have changed to justify moving up or down from 5%. Hope that helps.

[TonySoprano]

Must be nice to run a business where you were guaranteed a 20% profit regardless of external factors especially when one group will always retain the lion's share of said profits.

[BradyBunch]

Must be nice to run a business where you were guaranteed a 20% profit regardless of external factors especially when one group will always retain the lion's share of said profits.

That's RSNs for you.