BTW, the "most favored nation" clause that Comcast holds is a conflict of interest to negotiate lower per-subscriber deals. The 200 million the network may lose with the Direct TV deal may be a net positive for Comcast. If their percentage of CSN ownership X $200M is less than the savings from reduced subscriber fees that Comcast has to pay CSN.
-I think that the relevant law is that a company's directors and officers have a fiduciary duty to do what's in the best interest of the company whether or not the company is insolvent. The difference that insolvency/bankruptcy makes is that the fiduciary duty is now owed to the company's creditors (who are now the real economic stake holders since they are the ones first in line to receive the value of the company) rather than its shareholders. To the extent that Crane (and now Giles Kibbe as his replacement) is on CSN-H's board, he does have a fiduciary duty to its creditors to maximize the value of CSN-H business and the value of the bankruptcy estate. As I understand it, this is the point being argued and decided today. - I understand Crane's position and it's not an entirely crazy one. He got into this CSN-H business to further the goals of the Astros and this is why he (and the other parties) bargained for the veto rights and now he wants out if he is going to be forced to give up that veto right as a part of the reorganization. But I don't think that the judge thinks the fact that he wanted out overrides the law on fiduciary duties. - Crane may be getting screwed by losing his veto rights, but that's kind of the nature of a bankruptcy case. The company is insolvent, the business hasn't worked out, so the equity holders (and creditors, too) are all gonna get screwed and not get what they hoped and bargained for. Bankruptcy law is designed to realize the best going-concern value from a business to the extent that the business is salvageable and this is what the court is trying to do here.
By the way, the following is what I think will happen here, judging by what I read about this case and my experience with past chapter 11 cases: 1. CSN-H will ask to "assume" the media rights contracts with the Rockets and the Astros. This mean CSN-H will have to repay all the back payments owed to the teams (a.k.a. "cure the defaults") and then the parties basically operate in accordance to the contract. CSN-H will need to pay the contracted for rights fees and gets to broadcast the games. This only happens with the court's approval. I anticipate that the Astros will object to it and will litigate over the various legal issues around it The issues most likely include whether this kind of media rights contract is allowed to be assumed under the Bankruptcy Code and whether CSN-H is capable of curing the defaults and perform under the contract. The Astros are probably gonna argue that their equity interest in CSN-H and the veto rights are also part and parcel of the same contract so can't be divorced from the media rights contract . Judge Isgur is most likely inclined to approve the assumption at this point (as I noted, an reorganized CSN-H would find it hard to operate profitably without the Astros games) but we'll see. 2) There will be some sort of plan to "reorganize" CSN-H so that it gets to pay its creditors as best it can and go on toe hopefully operate as a functional business. This will likely be done via either a) an asset sale or b) the conversion of debt to equity (there are other ways to do it, but these are two of the more common methods to structure these things). Under the asset sale scenario, a new company will likely be formed to purchase all of the assets of CSN-H and run the channel. The new company may or may not have Comcast, the Rockets or the Astros as a shareholder and may have additional investors. But the key difference is that it's unlikely that they'll structure this to give everybody veto rights, which is how we got to this mess in the first place. The sale proceeds, whatever it is, will be used to repay CSN-H's creditors first, and then if any is left over, will go to the equity holders. Under the other scenario, we'll also have essentially a new entity, an "reorganized CSN-H," which will now have a different equity structure-- most likely with the current creditors of CSN-H (and a Comcast entity is one of these major creditors) plus maybe new investors becoming the equity holders and control the corporate governance of "reorganized CSN-H." Again, the point here is that the new corporate structure will likely NOT repeat the mistake of giving everyone veto rights and the new entity will be able to hopefully actually agree to carriage deals. Either way, we'll need court approval and some sort of creditor voting process in order to "confirm" a plan of reorganization filed with the court. It's gonna be a lot of lawyer hours.
Excellent analysis. The stalking horse bid that Comcast made awhile back makes sense under this scenario.
I don't understand how that really solves anything, though. If the only real offer anyone got (after three different entities attempted to negotiate deals) was one from DirectTV that everyone agreed would lose $200 million over a 10 year period and that the judge himself said was a rotten deal, what reason does anyone have to believe that removing veto rights is somehow going to magically create an offer from the other providers that no one was willing to offer in the previous 1.5 years?
Very good analysis. Makes a lot of sense. Hopefully everything will work out for all parties involved in the end and hopefully the biggest losers so far in this fiasco (the fans of the teams) come out winners in the end meaning we can all watch our teams!!!
What the judge apparently believes is that there are carriage deals out there to be made that could allow a reorganized CSN-H to be viable. Not sure what was argued in court but I'd guess that the parties arguing in favor of reorganization have at least presented some evidence that there is a viable business plan going forward. Now, this business plan and the carriage deals may or may not be to Crane's liking but they are probably projected to do better than the "$200M losses" scenario. This is what the "best for Astros" vs. "best for CSN" discussion is about, I think. A deal that causes CSNH to incur long term losses is most likely bad for both CSNH and the Astros. But there could be some deals that are at least good for CSNH but may not be great for the Astros. The bankruptcy court should not confirm a plan of reorganization that is going to just bring this reorganized company right back in chapter 11 because of heavy losses.
I don't think any good deals are out there. Now that the channel has absolutely zero leverage (hence the rockets striking out in the latest "go make a deal" period). The best time to secure carriage was before this network even came close to hitting the air... and some say Comcast never really expected any of the other providers to give in from the beginning. Again, look for everybody to bleed this network dry, till there's nothing salvageable, then walk away. I don't see this network getting widespread coverage at this point.
This. The whole problem is that the asking price was, and apparently remains, TOO HIGH. There HAS to be an acceptable 'middle ground' somewhere that will realize profits for all involved. The Rockets and Astros have been on TV, selling advertising and generating revenue every year until the past two - the teams television broadcast right are not valueless, so they ARE a viable product. It's just that, in THIS MARKET, and in the CURRENT form of an all-time historical worst baseball product, they can neither reasonably ask premium fees, nor expect premium fees to be paid. The carriage deals are held at bay because of the unreasonably high asking price AND the absolutely STUPID situation of the carriers still being obligated to Fox for the channel they were both already ON before they just went full-we-todd and went off on their own to make their own network. Someone (preferably all three entities together) will have to ultimately pay off Fox, to get them to bow out of the market. THEN, the reorganized new channel company will have to negotiate in good faith with the carriers to arrive at a fair price which the market will bear.
Sure, this is the ideal solution... but if it were in any way possible, it likely would have happened at some point in the last 2 years. Also, its not easy to get Fox paid off... as they sell their channels in a bundle (FX, FS1, Fox News, FMC), and the providers are basically stuck with FSN if they want to keep the other channels (which they do). Of course, any diligent company (Rockets/Astros) "should" have figured that out prior to starting up a new channel... or they "trusted" the company that supposedly had experience in all of this, who likely sold both of them that it wouldn't be a problem. Yes, both team's media right ARE a viable product... which means it would have been easier to just dissolve the channel, give the teams their rights back, and let them re-sign with Fox, MLBN, or whatever other established/full carriage sports channel there is. Instead, they're now in restructuring limbo, with appeals, delays, and high likelihoods for additional road-blocks from the other providers to get full coverage, since the channel has zero leverage (bankruptcy court or not). And finally, if they do (by some miracle) come to a sub-par agreement that leads to widespread losses amongst all the parties, the product on the field/court has the possibility to suffer.
How about this solution.? Since apparently there is consideration to strip the Astros of their veto rights during the reorganization, why not consider action that would actually increase the likelihood that the network can be profitable?: Strip the MFN clause from Comcast's partnership. Then the network can take the DirectTV deal at a non-premium rate, because it does not reduce the current income. Call it a trade. Astros and Rockets agree to give up their veto rights on the condition that Comcast gives up MFN. IMO that is the only way to make CSN profitable and is fair to all parties. Then AT&T and Suddenlink are more likely to sign up at the DirectTV rate. Comcast probably isn't a big winner until their 20 year deal is over at the premium rate, but then they'll make huge money because they fully control the network and can lower their own subscriber premium at that time.
Agreed, but I could see CSN H somehow having a partnership with Fox that allows for a larger viewer footprint (additional revenue) for the Astros than CSN H can provide.
Why? if the price goes too low, it will reduce the net revenues to CSN-H. So it's possible (not certain) that the only price providers are willing to pay at this time is not viable. There's no guarantee that there is a middle ground that is viable, let alone appealing. I think you severely overrate how carriers look at short and long-term - I doubt that's a significant factor, especially with the Rockets balancing it out on the other end being a top tier team for the next several years. But being a product with value above zero doesn't mean that CSN-H can be viable. FSN is not going anywhere - they cover other products like college football that have demand. I believe it was stated earlier that the rate paid to them already has been dropped to account for the loss of the Rockets and Astros (since they switched from FSH to FSSW).
This is the interesting solution that would clearly work and clearly also make everyone in the partnership unhappy. It would be interesting to see Comcast's response to this - which would presumably be the same as the Astros in regards to whether the partners are obligated to do what's best for CSN-H even at their own expense.
I personally wouldn't care if they did that. The problem may become that particular contractual language likely resides within the contract between the CSN H (The Network) and Comcast (The Provider). That's much like the Court asking the teams to lower their media rights fees to make the Network profitable. Those are contracts between the Network and the teams. Maybe it can happen but thinking as a guy who deals with contracts, that's a concern that I might think would be raised by the court.
It seems like the Comcast carriage rates and MFN clause was part and parcel to them becoming the third partner in the network. Comcast is probably smart enough to isolate this clause from Bankruptcy, but it's obvious there is a link there. It also appears to be the Astros/Rockets biggest hold-up to signing less than premium carriage deals...
From what I remember, it was a demand of both the Astros and Rockets to shoot for the moon in regard to carriage rates. Comcast was wary of that strategy and didn't want to get stuck paying them if no one else did. The only way Comcast (The Provider) would agree to paying the rates was if the MFN was inserted. It was Crane's biggest holdup. Alexander was willing to sign off on lower carriage fees all well knowing the MFN would kick in. Maybe Comcast the provider would be willing to pay more than the DirecTV deal but not the current $3.40 per subscriber fee. That would be helpful and a huge gesture to get things moving.
