News Corp.’s YES deal bodes well for Dodgers

This post has been corrected. See below for details.

In another sign that TV sports rights are the hottest game around, News Corp. has agreed to buy a 49% stake in a regional network that provides local broadcasts of New York Yankees games.

News Corp. did not divulge financial details of the arrangement. However, analysts estimated the media giant controlled by Rupert Murdoch will pay roughly $1.47 billion for the stake in the Yankees Entertainment and Sports Network.

The YES network also agreed to an extension of a TV rights deal that will keep the Bronx Bombers’ baseball games on the network through 2042 at substantially higher rates, which could bode well for the Dodgers, who are poised to negotiate a new TV rights deal.

The 10-year-old TV network had been valued at about $3 billion. The sports network provides local coverage of New York Yankees baseball and Brooklyn Nets basketball. It is available in about 9 million homes in New York, Connecticut, New Jersey and parts of Pennsylvania.

Having an ownership stake in an important regional network and a 30-year TV rights deal locked up will give News Corp. a hedge against the skyrocketing costs of sports programming.

Owning the stake also will allow the company to boost fees by packaging the channel with others that it owns, including a planned national sports network envisioned to compete with ESPN, controlled by Walt Disney Co.

“What’s driving all of these transactions is a desire for sports programming,” Adam Chase, a partner in the Washington, D.C., law firm Dow Lohnes, which specializes in such deals, said in an interview.

The 30-year contract extension keeping the Yankees’ games on YES was a key component of the deal, Chase said.

For the next few years, YES would pay the Yankees close to the $85 million a year that the network currently pays, with fee increases of about 5% every year. By the end of the contract term, YES will pay the Yankees a projected $350 million a year.

Such increases are a big part of the reason that the new L.A. Dodgers owners felt confident enough to pay $2.1 billion to buy the franchise earlier this year.“Now that this deal is complete, the next loudest cheers are probably coming from the Dodgers ownership,” Chase said. “It’s no secret that the Dodgers’ media rights deal is coming up for renewal next year, and you have Fox out there, and Time Warner Cable circling. This now sets the market for what these sports rights deals are worth.”

News Corp. in three years will have the option to increase its interest in YES to 80%. At that point, the investors believe, the channel would be worth at least $3.8 billion, according to a person familiar with the financing. That would allow two of the inaugural partners, Goldman Sachs and private equity firm Providence Equity Partners, to exit the venture after more than quadrupling their initial investment.

Yankee Global Enterprises, the other significant owner, plans to retain an ongoing stake in the channel.

Sanford C. Bernstein & Co. media analyst Todd Juenger in a research report called the YES valuation “extraordinarily high,” but said, “There seems to be little risk. The Yankees are probably the single most prestigious franchise in American sports.”

News Corp. still faces competition for sports rights, Juenger said. In Los Angeles, the company lost the rights to the Lakers basketball games to Time Warner Cable, which used its Lakers TV deal to launch a new sports channel.

“News Corp. still faces the threat of ever escalating rights in markets like Los Angeles, but at least this [YES] event seems to decrease the likelihood that, say, the Lakers or the Dodgers would create their own network rather than licensing their local rights to a third-party regional sports network,” Juenger said.

Investors have been interested to see how News Corp. plans to use its stockpile of more than $10 billion in cash. The company has been sitting on the money mound since its bid last year to buy the remaining stake in British Sky Broadcasting was scuttled amid the tabloid phone hacking scandal.

News Corp. Deputy Chief Operating Officer James Murdoch, who is a board member of Yankee Global Enterprises, was key to News Corp.’s bid for YES.

“We’ve long been a believer in the unique appeal of sports entertainment. Partnering upstream with rights holders is even more important today in the dynamic media marketplace in which we compete,” James Murdoch said in a statement.

Major League Baseball must approve the TV rights agreement with the Yankees. The YES transaction is expected to close by the end of December.

[For the record, 12:10 p.m. Nov. 21: An earlier version of this post said YES network would pay $350 million a year for the rights to broadcast New York Yankees games. In fact, YES will pay the Yankees $350 million a year toward the end of the proposed 30-year contract. For the next few years, YES would pay the Yankees closer to the $85 million a year that the network currently pays, with fee increases of about 5% every year.]

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