Stugray2
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RE: Does the LHN make financial sense for ESPN?
(06-03-2019 04:30 PM)quo vadis Wrote: (06-03-2019 12:56 PM)Stugray2 Wrote: (06-02-2019 01:33 PM)Fighting Muskie Wrote: I'm going to say no. I think when the original LHN deal runs its course they should low ball Texas on the renewal deal and present the counter offer of going to the SEC, where ESPN already has a T3 deal in place, with TTU as a companion, and the LHN will be converted to SECN2.
I just don't think it makes financial sense for the Mouse to pay what they pay the Big 12 for T1 and T2 and then an absorbed amount for Texas T3 and their own dedicated channel that has very little live content. Outside of Texas and Oklahoma, there really isn't much premiere content to attract viewers.
What do the rest of you think will happen when the B12 GOR runs out and the LHN is up for renewal?
The LHN runs through 2030-31 season (June 30th 2031), six years past the B12 GOR expiration on June 30th, 2025 (after the 2024-25 season). There is no "out" for ESPN. So they would have to buyout the remaining contract, which has both a monetary transfer as well as agreement to provide to Texas through the end of the contract the equipment (as technology changes) to run a modern digital network, reportedly that is also quite high. Yes the contract is a disaster for ESPN, but fortunately it's a rounding error for the company annually.
So how much would it cost to buy out? A quick look at the payout tables, which is easy spreadsheet math to calculate, we see this
PHP Code:
Payout +3% per year Year $10,883,665 2011-12 $11,237,384 2012-13 $11,602,599 2013-14 $11,979,684 2014-15 $12,369,023 2015-16 $12,771,017 2016-17 $13,186,075 2017-18 $13,614,622 2018-19 $14,057,097 2019-20 $14,513,953 2020-21 $14,985,656 2021-22 $15,472,690 2022-23 $15,975,553 2023-24 $16,494,758 2024-25 $17,030,838 2025-26 $17,584,340 2026-27 $18,155,831 2027-28 $18,745,895 2028-29 $19,355,137 2029-30 $19,984,179 2030-31
To date ESPN has paid out $97,644,068, with the 2018-19 payout being $13,614,622.
The cost of the remaining payment is $202,355,927, which would be a good estimate of your buyout cost today.
I think Texas would agree to a buyout for considerably less, if it's a one-time lump sum payment, which is the only reason for ESPN to do it (the current arrangement already is a spread-out payment scheme).
For one thing, the time value of money would be big. I haven't done an NPV in a while but because $202m today is worth a lot more than $202m paid over the next 12 years..
Second, Texas would then be free to turn around and sell those T3 rights to someone else, and that would be worth something to them as well. Now of course, they wouldn't want to reduce the amount of the ESPN payout be an amount equal to the new rights sales, because as you say they want to profit off of this.
So let's say that Texas thinks that $202m spread out over 12 years is worth a lump sum of $155m today assuming a discount rate of 2% annually.
Then, let's say Texas lines up FOX to pay it $8m a year for those 12 years of content that is moving off the defunct LHN. The PV of that $96m in future payments might be say $70m. FOX covers the same production costs that ESPN was covering, if any.
So $155m - $70m = $85m. But because Texas has no reason to do this without earning a healthy profit, add $20m in ...
Texas might take a lump sum payout of $105m or thereabouts from ESPN right now to close down the LHN and all ESPN future obligations.
I too think Texas will agree to less of a buyout, but NOT today, and not in the next six years.
1. They are locked in the B12 by GOR until June 2025.
2. The other 9 schools are locked in the B12 until June 2025, the little 8 with 3rd tier tied to that date via ESPN as well.
3. They are getting B1G level revenue when you add LHN money to B12 distributions (about $52.5M this year, while Michigan expects $54M)
-- there is no need to do anything now, this is better than SEC money
So that $202M figure is a buyout today figure, and it makes no sense for either side. Texas has in hand as much money as all but a couple B1G programs. They are at no disadvantage and that money is guaranteed. ESPN keeps the B12 intact which meets their need of avoiding too strong a cartel like the NFL, MLB or NBA. So forget that number.
The number that matters is 2025-31, the last six years, after GOR for the B12 and when OU likely leaves. The situation changes. The remaining payments will total $111M. At this point the number is small enough and the risk to both sides low enough that they can move. If they join the SEC or B1G and ESPN refuses to buyout, then they still collect $18.4M a year in 3rd tier money and will not be at any significant disadvantage to their new conference mates.
So focus on that $111M number. That is the starting point for a buyout. I was speculating 40-50% below that, given Texas' leverage, noted above. But ESPN has leverage too. So quite possibly the figure could be even lower than that. I put the high end cost at about $57M, but yes it could be only $30M to close it out. Once Texas moves to another conference, the entire point of the LHN will be over, it wont have kept the B12 together.
As for people who have the idea of expanding the LHN for more Texas D1 sports, forget it. This is Saturn, Oldsmobile or Pontiac for ESPN. An extra brand that duplicates overhead. For ESPN they will look at the cost savings of overhead, and say it's $2.5M per year, and that is $15M buyout, then double that for one time write off and you are at $30M
So think we have a logical bound for the buyout. No less than $30M, no more than $57M. That is in 2025.
I think you focused on $202M because that is the June 2019 price, but there is zero reason for Texas to leave the B12 in 2019 and zero reason to end the money coming in from the LHN in 2019. But the picture is different in 2025 (GOR done, LHN contract winding down, buyout smaller). I am very much convinced both the SEC and B1G see enough value in Texas that they would be willing to wait out 6 years of the LHN to run out (they would not be willing to wait 15 years in say 2016). But talk of a 2019 or 2020 buyout is crazy. Who is offering to pay Texas $20-25M per year for their 3rd tier rights?
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