BY GRAYDON EBERT
Bell and Rogers Join Forces to buy MLSE
Bell and Rogers Join Forces to buy MLSE
On Friday, two of Canada’s biggest telecommunications and media companies, Rogers and Bell announced their joint purchase of 75% of Maple Leafs Sports and Entertainment (MLSE) from the Ontario Teachers’ Pension Plan. The deal, sees each company own 37.5% of MLSE, paying slightly over $500 million each, and previous minority owner and chairman Larry Tanenbaum increasing his share to 25%
There had been previous reports of a possible joint bid between Rogers and Bell being shutdown followed by further reports that there had been US equity funds looking into buying MLSE with Wayne Gretzky being approached to front multiple ownership groups.
Despite interest from these equity funds (although the seriousness of this interest is unknown) it is likely that the $1.33 billion that Bell and Rogers paid for the Ontario Teachers’ Pension Plan’s shares is the most that any group would have been willing to pay. Simply put, MLSE brings more value to Bell and Rogers as media and distribution companies, than it would to any other purchaser.
Why? If you listened to the press conference, the key words that executives from both Rogers and Bell used were “content” and “distribution”. Understanding these words, unlocks why Bell and Rogers would value MLSE more than any other suitor.
Content
MLSE owns many different properties. It owns real estate, a sports bar, the Air Canada Centre, BMO Field among other things, but it’s most valuable properties are the four sports teams, the Leafs, Raptors, Toronto FC and the Marlies. One of the key revenue streams of these teams are the broadcast rights. For Toronto FC and the Raptors, MLSE controls these broadcast deals on a national basis. For the Leafs, it controls the broadcast rights to 51 regional games. All of these games are premium broadcast content.
Broadcast rights for all sports are being secured by television networks for increasingly record-breaking amounts. Television networks were so interested in having NFL games on their networks, that they were willing to pay the NFL $4 billion during a lockout with no actual games just to keep the rights. Sports content is so valuable because in this diverse and on demand media culture, it is some of the only content where people watch it live and don’t DVR through commercials. This makes advertising during sports more marketable and increases the advertising revenue that networks can generate. So, as the owner of four sports teams, MLSE has a wealth of valuable, premium sports content for multiple media platforms, including broadcast, mobile, internet, etc. To illustrate how valuable this content is, in their current deal, Sportsnet pays roughly $700,000 a game for 51 regional Leafs games.
Distribution
In essence, Rogers and Bell are predominantly distribution companies. They own and operate different media platforms and distribution systems. They both own cable/satellite distribution systems, as well as internet and mobile systems. Most Canadians use at least one service from one or both of these companies. Very little media consumed in this country is not consumed through either Bell or Rogers services. They also own several television and radio stations through which this media is provided. In the case of sports, Bell owns the TSN stations on both television and radio, while Rogers owns the Sportsnet stations on both mediums. As the owner of cable stations, Rogers and Bell charge each other and other distributors for the right to broadcast their stations, and they earn revenue for the advertisements that air on these stations.
Marriage of Content and Distribution
The reason that Rogers and Bell would undoubtedly value MLSE the most is because of the advantages that come when content and distribution are owned by the same entities. Marrying content and distribution in the same company allows that company to leverage both to create maximum value.
On the distribution side, owning the content provider has advantages. Now that Rogers and Bell own MLSE they don’t have to go into the marketplace to buy the broadcast game rights to the Leafs, Raptors, etc. They have each entered into long-term rights deals as part of this purchase. While these long-term rights deals are for fair market value, it does allow Bell and Rogers to avoid a competitive bidding process which could have made the rights even more expensive. Owning the content allows Rogers and Bell to sustain revenue growth and build value in their distribution systems. On the media distribution side, having control and access to MLSE content gives both Rogers and Bell the ability to creatively find ways to make their distribution systems more valuable to the consumer. I’m sure there are Leafs fans that would consider switching to Bell if Bell provided some sort of exclusive Leafs content on their mobile phone that they could get nowhere else, including Rogers. From a media perspective, owning MLSE content is a way for Bell and Rogers to maintain and increase revenues for TSN and Sportsnet respectively. Guaranteeing that their channels will have the premium MLSE sports content will guarantee stronger advertising revenue as discussed above. Having this content will also increase the value of these stations to distribution systems. Rogers will be able to charge distributors more for Sportsnet and Bell for TSN if they are the MLSE content providers.
For the content provider, being owned by the distributor is a way to maximize the value of the content. The distributor has a clear interest in making the content as valuable as possible. The more valuable the content, the more it can charge for the distribution of that content, both to consumers directly, and to other distributors. There are many ways a distributor can maximize value but they all go to increasing interest in the content. It can promote the content and engage the fan interest through new and innovative ideas. By increasing interest in the content through its media platforms, the distributor can cause an increase in fans and/or an increase in the revenue fans will spend on the content, thus increasing the value of the content.
An example of this can be found in the purchase of the Toronto Blue Jays by Rogers. There are numerous examples of how Rogers has attempted, with some success, to create interest in the Blue Jays. It made improvements to the Rogers Centre to make it more appealing to fans, it hired a progressive executive to improve the quality of the team, it increased the Blue Jays profile on its Sportsnet channels (including broadcasting all 162 games, hiring additional baseball media personnel, hosting a pregame show from Rogers Centre), it allowed Rogers’ customers to stream games, among other things. While it has been slow to materialize through increased revenues, there is definitely more interest in the Blue Jays than before Rogers bought the team and theoretically this increase in interest will lead to an increase in revenue through increased ticket revenue (both more tickets sold and a higher average ticket price), jersey sales, and other merchandise.
So, it seems clear that marrying content and distribution is a way for an entity to maximize the value of both. It is becoming more and more common in the sports industry for distribution companies and content providers (i.e. sports teams) to have common ownership. Fox used to own the Dodgers, and are rumoured to be interested in buying them back. Time Warner, Disney and Comcast have all owned sports teams at some point in the last twenty years. On the flip side, several content providers have gotten into the distribution business. The Yankees have the YES Network, the Red Sox have NESN, the Mets have SportsnetNY, the Washington/Baltimore teams have MASN and some Texas teams including the Mavericks and Rangers are starting their own regional sports network. The fact of who owns who might be different but the premise remains the same, marrying content and distribution is a way to maximize the value of both, or at least that is the bet Rogers and Bell are making.
The public has asked a lot of interesting questions about this deal, and it might be helpful to take a look at some of these issues
As a Rogers/Bell customer, will I be paying for this purchase with higher fees for services?
The answer is probably yes and no. Consumers aren’t likely to be directly paying for the purchase. In the grand scheme of things $500 million to each company is not a very big investment. However, as already discussed, for Rogers and Bell, owning the content is a way to make their distribution systems more valuable. It is likely that Rogers or Bell could decide to charge their customers more because of the exclusivity of their content. This scenario is even more likely to occur should either party win the bid for national broadcast rights from CBC, meaning that all hockey content on Canadian television will require cable or satellite. Another way that Rogers or Bell can extract value for owning the content is an increase in the amount they charge other distributors (including each other) for their Sportsnet and TSN channels (this is how ESPN became the giant it has become. It got NFL broadcast rights and started to charge distributors more and more to distribute ESPN. These costs were then passed onto the consumer in higher cable and satellite bills). This means, even if you aren’t a Rogers or Bell customer, you could potentially see an increase in fees. Now, because of the competition between Rogers and Bell, they might be less likely to raise prices, trying to undercut each other, but it would not be surprising to see higher fees as a result of this deal long-term.
If $500 million is a small investment for Rogers and Bell why didn’t either company go it alone rather than joining forces?
There are a couple reasons. If you listen to the executives from both sides, they would say that MLSE has so much content that neither side (even with multiple broadcast platforms) has enough on air inventory to fit in all the games in their schedule. The TSN stations already have a lot of national NHL and NBA games as well as auto racing, golf, tennis, curling, CFL, NFL etc. and the Sportsnet stations have regional TV deals with many of the other Canadian hockey teams as well as all 162 Blue Jays games. From that perspective both sides didn’t have a problem sharing ownership in the content, because they could not use it all anyway.
The other main reason is a recent CRTC decision regarding the exclusivity of media. Essentially, the CRTC ruled that media companies cannot obtain rights to media properties and broadcast this media exclusively to those who subscribe to its distribution system. So Rogers could not acquire the broadcast rights to the Leafs and then broadcast games on a channel that only Rogers customers could get. If Rogers could do that, then there would be much more incentive for them, or Bell, to purchase MLSE on their own and broadcast games on an exclusive channel, requiring anyone that wants to see the games purchase their service. This would make MLSE even more valuable for both Rogers and Bell. However the CRTC ruling precludes this possibility. If Rogers purchased MLSE by itself, it would still have to make available any channel on which it broadcasts MLSE content to other distributors, there is less need to own all the content exclusively.
Will Bell and Rogers be able to work together?
There are probably no two companies in any Canadian industry that compete more aggressively than Bell and Rogers. This competition is fought in every media platform and distribution system. Will they be able to co-exist as owners of MLSE. They do have a history of working together in joint ventures. They formed a consortium for the broadcast of the 2010 Winter Olympics in Vancouver and will work together to broadcast the 2012 Summer Olympics in London. Together, they jointly own Dome Productions, which is at the forefront of high definition sports production in the world. So they have a history with some success.
It is likely that they will have a relatively harmonious relationship in MLSE. Each side made an investment and are likely to allow the incredibly capable MLSE management team continue to run the business successfully. Rogers has stayed out of the day-to-day business operations of the Blue Jays and there is no reason that it will act differently with MLSE. There is no doubt the potential for conflict between Bell and Rogers in the operation of MLSE, but they, along with Tanenbaum, will have a shareholders’ agreement which will undoubtedly provide for mechanisms to resolve these conflicts. With each side holding 37.5% of MLSE, Tanenbaum and his 25% will likely play a key role in resolving any potential disputes.
Is Bell and Rogers joining forces anti-competitive? Will this deal be reviewed?
Undoubtedly when two competitors get together on a joint venture, this raises competition concerns and will draw the attention of the Competition Bureau. Also, since broadcast licenses (Leafs TV and Raptors NBA TV) will be changing ownership, the CRTC will be required to exercise its powers of review. However, it is not clear that this deal actually hinders competition, and in some way it might actually increase it. Rogers and Bell will be splitting the broadcast rights evenly. As a consumer and a fan of MLSE teams you still have the ability to purchase services from Rogers or Bell and will have access to MLSE broadcasts either way. Should you be able to only purchase one of Rogers or Sportsnet, you can choose one and still have access to MLSE broadcasts no matter which you choose.
Since neither Rogers or Bell are exclusive owners of MLSE content they must continue to maintain competitive prices for their services or risk losing customers to the other. Also, as joint owners of MLSE content, Rogers and Bell will be competing with each other by trying to outdo each other in new media platforms and with innovative ways to bring exclusive content and access to its customers. In a way, this joint ownership breeds much more competition than had Rogers or Bell purchased the team on its own.
How will this affect the performance of MLSE teams?
For most fans this is probably the key question. There is no simple answer. It is very likely that this deal will not impact performance at all. Under the ownership of the Ontario Teachers’ Pension Plan, MLSE spent significantly. It spent about as much as it was allowed on players. It spent significantly on the top front office and executive positions, on training facilities, etc. There was no doubt as to ownership’s willingness to spend. Rogers and Bell will undoubtedly continue to spend as before.
However, Rogers and Bell are likely to have a mind-set that is puts an even higher priority on fielding winning teams. The Ontario Teachers’ Pension Plan ownership of MLSE was based on a pretty typical business strategy. They made money on the income of the company and parlayed the growth of this income into a gain on the value of their equity in the company. MLSE income grew leaps and bounds during their ownership, while the performance of the teams was mediocre at best. At least with the Leafs, fan interest and willingness to spend did not depend on the team performance. In economic terms, the relationship between MLSE revenue and MLSE team performance is inelastic.
Rogers and Bell, of course, value MLSE on its ability to provide income and to increase the value of its equity. However, as discussed, Rogers and Bell place significant value in MLSE’s ability to grow the value of its distribution businesses. This value is maximized when MLSE content is most valuable. While interest in MLSE teams is not dependent on team success, interest still does increase when MLSE teams are successful (especially with the Raptors). This increase in interest correlates with more people watching games and other MLSE content, increasing the value of this content. As both the owners and distributors of this content, Rogers and Bell will realize on this increase value. It is possible that from an economic standpoint, no other owners would have as much incentive for MLSE teams to be successful as Rogers and Bell.
How does Rogers/Bell ownership of MLSE affect the possibility of a second NHL franchise in Toronto?
This has been a hot button topic in the days following the deal, with many wondering if Rogers and Bell would strongly oppose a new team in Toronto to protect their new investment. Others have suggested that given the large expansion fee that a second team in Toronto would generate for the NHL, the league might require Rogers and Bell to allow the possibility of a second team or it would not approve the sale.
How does Rogers/Bell ownership of MLSE affect the possibility of a second NHL franchise in Toronto?
This has been a hot button topic in the days following the deal, with many wondering if Rogers and Bell would strongly oppose a new team in Toronto to protect their new investment. Others have suggested that given the large expansion fee that a second team in Toronto would generate for the NHL, the league might require Rogers and Bell to allow the possibility of a second team or it would not approve the sale.
It is highly unlikely that the NHL will not approve this deal, regardless of Rogers’ and Bell’s position on a second NHL team in Toronto. Rogers and Bell are influential in the sports business and business generally in Canada and the NHL will not want to negatively impact its relationship with these companies, even for the sizable expansion fee it could get for a second team.
As for whether the acquisition of MLSE by Rogers and Bell makes a second team more or less likely it is not yet clear.
Rogers and Bell may be protective of their new investment and try to prevent any competition in the Toronto market. However, when you think about the reason MLSE is valuable to Rogers and Bell, there is a strong argument to be made that they would be receptive to a second team in Toronto under the right circumstances.
Recall that Rogers and Bell valued MLSE so highly because of its premium sports broadcasting content that they could distribute on their media platforms. A second team in Toronto would similarly have a block of premium sports content up for grabs, which undoubtedly would be of interest to both Rogers and Bell. So, it may actually make sense for Rogers and Bell to allow the possibility of a second NHL team in Toronto. They could extract a sizable territorial rights fee from the NHL to allow the team and could also ensure the broadcasting rights to the new team at a price less than what they might have to pay on the open market.
There is precedent for this sort of action. When the Montreal Expos were going to be moved to Washington to become the Nationals, they were within the territorial area of the Baltimore Orioles. At first, the Orioles and owner Peter Angelos were against a team moving to Washington. However, they allowed the move to happen. Why? In return for allowing the Nationals to move to Washington, they earned the right to broadcast Nationals games on their Mid-Atlantic Sports Network (MASN) and on the radio. The Orioles own 90% of MASN and when it was set up, Major League Baseball paid the Orioles $75 million for 10% of the network. This stake is now owned by the Nationals, who also receive a below market value fee for their broadcast rights.
Why wouldn’t Rogers and Bell do something like this? If the value is in the content, then adding the content of an additional team to their inventory at a reasonable price should be more attractive to Rogers and Bell. The concern that a second team would hurt the value of the Leafs brand is probably unwarranted. Prestigious sports brands do not seem to be negatively impacted by the introduction of new teams in their market. The Lakers aren’t hurt by the Clippers. The Knicks aren’t hurt by the Nets. The Rangers aren’t hurt by the Devils or Islanders. The Yankees aren’t hurt by the Mets. The advantage that a prestigious team in terms of fan interest has over the new team in its market is significant. This would undoubtedly be the case should a second team join the Leafs in Toronto.
