One of the more intriguing terms in Diamond Sports’ recently announced restructuring agreement is that it will provide Amazon.com with a path to near-parity ownership of the YES Network alongside the New York Yankees.
Depending on Diamond’s performance, Amazon may be able to acquire a low interest in the New York-area RSN that broadcasts the Yankees, Brooklyn Nets, and WNBA’s Liberty.
Diamond Sports announced a restructuring plan a week ago that would see the bankrupt regional sports network owner generate about $1 billion through fresh investments from 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, which likely results in the mega-retailer deepening its business relationship with baseball’s highest profile team..
According to the planned arrangement, Amazon will contribute $115 million for a two-year convertible note in Diamond. That means Amazon will be paid interest on its money, which amounts to approximately $7.2 million each year, as well as receive all of its capital returned within 24 months. If Amazon wishes, it can convert its note into 15% equity in Diamond—and if it does, it receives a bonus option, which we will discuss below. Amazon’s purchase also includes the option to buy another 10% stake in Diamond for an additional $50 million.
According to studies of company bankruptcies in the United States, businesses have a better chance of surviving after Chapter 11 if they can put together a restructuring plan similar to the one Diamond recommends. However, the deal is not without dangers for investors: According to a Harvard Business School working paper from 2015, more than 6% of companies with restructuring agreements re-entered bankruptcy two years later, while another 10% were bought. The paper does not discuss acquisition valuations, although data suggests most of such acquisitions are made under duress to prevent re-entering bankruptcy.
So, given the not-insignificant possibility that Diamond will not be able to stand on its own two feet for long, Amazon gains a great asset to backup its investment: Diamond provides as collateral its 20% stock stake in the YES Network. The agreement makes it clear that the YES equity is dedicated to guaranteeing Amazon’s investment first. “The ‘YES Interests’ will not have any other assets or incur any ” liabilities or debt other than a guarantee of the Convertible Notes,” the term agreement with Amazon states in part.
That means that if Diamond fails to make an interest payment or cannot return the $115 million in full after two years, Amazon may seize Diamond’s YES equity. How much is that worth? In 2019, a Yankees-led partnership purchased the remaining 80% of YES for $3.47 billion in enterprise value. That implies Amazon will have first dibs on approximately $700 million in equity at the 2019 valuation. The Yankees would likely declare today that they could sell YES for a substantial premium over the 2019 price—Amazon could obtain a fifth of YES for a tenth of its genuine value.
Amazon is unlikely to acquire YES shares for a low price, but it could happen. For starters, Amazon must cooperate with any effort to sell the YES shares, making it unlikely that Diamond will declare bankruptcy and forfeit the entire value of YES. But Amazon covers its bases. What alternative does the corporation have if the Amazon debt is converted into equity? The right to purchase all 20% of YES shares at a reasonable market price. And Amazon will have that option for two years after Diamond emerges from bankruptcy, even if its $115 million note has been paid in full.
According to data gathered by S&P Global Market Intelligence, the Yankees control 26% of YES, Diamond owns 20%, and Amazon owns 15%, with three other owners owning 13% each: asset management giant Blackstone, Abu Dhabi sovereign wealth fund Mubadala, and sports-focused private equity firm Redbird.
In around two years, it appears that Amazon will hold 25% of YES, whichever way.
