The Nationals Lost Money Because of the RSDC Decision

Summary: While the RSDC decision allows the Nationals to receive more money in media rights fees than MASN's request, it also causes the Nationals to lose money due to lower equity stake distributions and loss of equity value. The amount that the Nationals lose due to lower equity stake distributions and loss of equity value is larger than the amount they gain in total media rights fees. Therefore this decision causes them to lose money.

Warning! Gory Mathematical and Financial Details Ahead! It’s hard to sufficiently explain how valuations work without using jargon that can be difficult to understand. 

The latest documents from the MASN case shed light on confidential conversations about a possible sale of MASN. These discussions ultimately weren’t fruitful but the parties created numerous pro forma documents discussing potential terms for a sale. These documents include figures that make it possible to determine the equity value of MASN and therefore discuss the total difference in value between MASN and the RSDC's proposals from 2012-2016.

There are two factors that are necessary to determine the equity value of an enterprise. The first is the “exit multiple.” The second factor is the “discount rate.” Let's start with the "exit multiple." Basically, an RSN is valued based on its profits. An RSN that earns $100 million in profits is more valuable than one that earns $10 million. But one wouldn't agree to sell their business for one year's worth of profits by itself. So, the “exit multiple” is used to determine how much more than profits a business should be worth. The "exit multiple" multiplied by profits determines the future value of an RSN.  This also means that if MASN earns less in profit, then it's worth less as an enterprise.

The “discount rate” is used to determine the rate of return necessary for one to invest in a business. This takes into account rates of return for other investments as well as possible risk. Think of it this way. I can invest money in treasuries and be highly certain that they won't default. If I were to buy a 30-year bond for Sears, it is considerably less likely that they won't default. Therefore, I may want to use a discount rate of 2% when buying a treasury bond while using a discount rate of 20% when buying a bond from Sears. I need to receive a higher rate of return from Sears than from U.S. treasuries because an investment in Sears is so much riskier.

These pro forma documents indicate that a fair exit multiple is 15 and a fair discount rate is between 9-11% for a network owned by a media company. They argue that a fair “exit multiple” for MASN under current conditions is between 12 and 15 while a fair discount rate is between 11-13%. The people who drafted these documents believe that the RSDC decision reduces the certainty of future MASN cash flows as well as the viability of MASN as a profitable RSN. In other words, they believe that it is reasonable to claim that a fair “exit multiple” is 15 while a fair discount rate is about 11%. However, they also believe that MASN's value should be discounted due to the RSDC being unwilling to allow MASN to earn a reasonable profit. If the RSDC is going to force MASN to pay unreasonable rights fees, then any buyer is going to refuse to pay full price (even if they were allowed to pay fair rights fees).

By multiplying the last year of free cash flow by the exit multiple listed above one can determine the terminal value of MASN at the end of 2016. Once that is known, it is possible to determine the present value (present value is 2012 and not 2014 because 2012 is when the deal started) of MASN by means of discounting expected income streams using the discount rate while also using the discount rate to determine the present equity value of MASN. 

There have been enough documents that it is possible to determine MASN's revenues, expenses, media rights fees, profits, and equity distribution according to both MASN and the RSDC. This pro forma document created by Allen & Co. has helpful information.

I've also created a document and spreadsheet that discuss in more detail what results I use for MASN's and the RSDC's proposals based on what is in the actual reports. 

According to MASN's proposal, MASN is predicted to earn a profit of roughly $67.7 million in 2016 and therefore has a terminal value in 2016 of $1.01 billion.  With a discount rate of 11% over a five-year period, the present value of terminal value is $603 million of which 83% will belong to the Orioles and 17% will belong to the Nationals. Determining the present value of media rights fees and equity distribution can be accomplished by discounting 11% per year from the amount of each received. For example, the Orioles and Nationals are expected to earn $42M in media rights fees in 2015. That amount is equal to $42M/1.11^3 or roughly $30.7M in 2012 dollars. In order to determine future value, one would increase the amount received by 11% until 2016. So, the $42M that each team receives in media rights fees in 2015 is worth $46.66 million in 2016. The chart below shows how much revenue each team earns from media rights fees and equity distributions using both present and future value using MASN's proposal.

According to the RSDC's proposal, MASN is expected to earn a profit of roughly $24 million in 2016 and therefore has a terminal value in 2016 of $360 million. The present value of its terminal value is $213.5 million. The chart below shows how much revenue each team earns from media rights fees and equity distributions using both present and future value.

This chart shows how much the Nationals and Orioles will earn using present and future value from each of these proposals. I use gross rights fees rather than net rights fees to determine total value because the Nationals currently would be eligible for revenue sharing if they weren’t ineligible due to being in a top 15 market. As a result, they won’t be paying revenue sharing tax on all of the money that they receive in rights fees and therefore using gross rights fees allows for a more accurate comparison.

Both the Orioles and the Nationals will receive increased rights fees from this deal but both will suffer significant losses in equity distributions and equity value. While the Orioles would suffer significantly larger losses if the RSDC decision is upheld, this would also result in the Nationals losing anywhere from $25-50 million dollars over the five-year period.

It is worth noting that a significant amount of the value that the Nationals will lose is from their loss of equity. The Nationals or Orioles will not be able to take advantage of any of this money unless they sell MASN to an outside buyer or if the owners of the Nationals or Orioles sell their team. It is also possible for both parties to agree to a media rights deal that could significantly increase the value of MASN right before selling it to an outside party and therefore increasing the value of MASN. However, pro forma documents written by Allen & Co. show that potential buyers consider the RSDC decision to be a detriment to MASN's value and therefore would reduce the amount that they’re willing to offer. Simply put, potential buyers aren't stupid.

The reason why the Nationals are willing to accept a deal where they lose money is because they believe they can receive higher rights fees in a situation where their media rights are not controlled by MASN. They believe that they can either force MASN to demand higher carriage fees (which will allow MASN to pay the Nationals a larger media rights fee while remaining profitable) or force MASN to sell the Nationals their rights. If the RSDC does decide that Bortz should be used, then MASN will likely be profitable for the foreseeable future and it could be a long time until the Nationals regain control of their media rights.

In the meantime, the value of the Nationals equity stake in MASN has decreased due to the RSDC's decision. At least from 2012-2016, the Nationals would receive more value for their rights if MASN had won rather than the RSDC.