One of the more intriguing clauses in Diamond Sports’ recently proposed restructuring agreement is that it will give Amazon.com a pathway to near-parity ownership—along with the New York Yankees—of the YES Network. Depending on how Diamond fares, Amazon could even get its stake in the New York-area RSN that broadcasts the Yankees, Brooklyn Nets and WNBA’s Liberty dirt cheap.
A week ago, Diamond Sports unveiled a restructuring plan that would see the bankrupt regional sports network owner raise close to $1 billion through new investment from a group of current debt holders, a lawsuit settlement with soon-to-be-former owner Sinclair Inc. and a new investment from Amazon. Interestingly, though Amazon will contribute a relatively small amount of money into Diamond—$115 million immediately if the plan is approved by the bankruptcy court—it is demanding a high price, one that likely ends up with the mega-retailer deepening its business relationship with baseball’s highest profile team.
Under the proposed deal, Amazon will contribute $115 million for a two-year convertible note in Diamond. That means Amazon will be paid interest on its money, about $7.2 million a year, plus get all its capital back in 24 months at the latest. If Amazon prefers, it can convert its note into 15% equity of Diamond—and if it converts, it gets a bonus option we’ll get to below. Amazon’s investment also comes with an opportunity to buy another 10% equity in Diamond for a further $50 million.
Studies of U.S. corporate bankruptcies show that businesses have a better chance of survival after Chapter 11 if they can cobble together a restructuring agreement like the one Diamond proposes. Still, the deal isn’t without risks to investors: A 2015 Harvard Business School working paper noted that two years after exiting Chapter 11, more than 6% of companies with restructuring agreements re-entered bankruptcy and another 10% were acquired. The paper doesn’t address acquisition values, but evidence suggests most of such acquisitions are under duress to avoid re-entering bankruptcy.
So, given there’s a not-insignificant chance Diamond won’t be able to stand on its own two feet for long, Amazon gets a nice asset to backstop its investment: Diamond pledges as collateral the 20% equity that it owns in the YES Network. The agreement makes clear the YES equity is dedicated to guarantee Amazon’s investment first: “The ‘YES Interests’… will hold no other assets and may not incur any liabilities or debt other than a guarantee of the Convertible Notes,” the term sheet with Amazon says in part.
That means if Diamond misses an interest payment or can’t repay the $115 million when it comes due at once after two years, Amazon could claim Diamond’s YES equity. How much is that worth? A consortium led by the Yankees bought back the 80% of YES it didn’t own in 2019 at $3.47 billion enterprise value. That means Amazon will have first dibs on equity worth nearly $700 million at the 2019 value. The Yankees probably would say today they could sell YES for a nice premium to the 2019 price—Amazon could get a fifth of YES at a tenth of its true value.
Odds are Amazon won’t snag YES equity cheaply, but it may come nonetheless. For one, Amazon has to cooperate with any effort to sell the YES equity, which makes it unlikely Diamond stumbles back into bankruptcy and loses all the value of YES. But Amazon covers its bases: That option the company gets if the Amazon note is converted into equity? The right to buy all 20% of the YES equity at a fair market value. And Amazon will have that option until two years after Diamond exits bankruptcy, even if its $115 million note has been paid back in full.
As it stands today, the Yankees own 26% of YES, Diamond 20% and Amazon 15%, plus three owners of 13% apiece, according to data compiled by S&P Global Market Intelligence: asset management giant Blackstone, Abu Dhabi sovereign wealth fund Mubadala and sports-focused private equity firm RedBird.
It looks like one way or the other, Amazon will be 25% owner of YES in about two years’ time.
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