When Canadian rivals Rogers (RCI) and Bell (BCE) teamed up to purchase Maple Leaf Sports and Entertainment (MLSE) lots of folks asked why. A man from north of the border, with a classic Canadian name, Jeff Beer, summed things nicely in TheProfitGuide.com:
The consensus for why these two shelled out to the Ontario Teachers' Pension Plan for 79.53% of MLSE could have been summed up in a headline, with three words written in all-caps and 5,678-point type: "CONTENT! CONTENT! CONTENT!"
But that explanation only gets you part way to understanding the Bell-Rogers pact. Content is key, yes, but you don't pay that kind of money and get into bed with a hated nemesis for just any content. What merits this kind of truce is live content with a best-before date, stuff like hockey games and soccer matches that fans can't wait to see. And sports is the king of live content, not only for TV, but web and mobile video as well. That's the driving force behind the MLSE deal, and it's part of a larger trend in broadcasting and media that has seen the price of sports broadcasting rights and advertising revenues around the world skyrocket. Sports is one of the last and most valuable vestiges of appointment viewing.
And, as The Wall Street Journal explains, Magic Johnson's group paid a seemingly insane amount - $2.15 billion - for the Dodgers to leverage the media-related possibilities:
But with its lucrative media rights coming free from contract after the 2013 season, the new owners have a rich opportunity to either launch a regional sports network in the country's second largest market or to hold an auction for the rights to telecast Dodgers games in a golden era for sports deals.
"If you realize it's not a baseball deal first but rather a television and entertainment deal that also comes with a real-estate opportunity, then you can begin to scratch your way back toward justifying the price," said David Carter, director of the Sports Business Institute at the University of Southern California ...
During the next six to 12 months the Dodgers' owners will select one of two lucrative alternatives to pursue at a time when marquee live-sports events have become increasingly valuable.
The simplest move would be to sell their local TV rights to an existing regional sports network ...
The other alternative would be for the Dodgers to launch their own network as the New York Yankees did with YES and the New York Mets did with SNY. These networks have become cash cows for team owners because of the monthly fees cable operators pay on behalf of all of their basic subscribers.
Analysts say a Dodgers network could command a monthly fee of about $3.50 per home beginning in 2014 and reach a market that could stretch as far east as Las Vegas and north to San Luis Obispo.
That could translate into nearly $300 million in revenue annually before the network sells a single ad spot.
Tie the MLSE and Dodgers deals together and you have major implications for investors. First, as the Journal notes, News Corp.'s (NWSA) regional sports network in Southern California could lose the rights to Dodgers baseball next season. Magic's group could create its own network or sell the rights to a FOX competitor, TWC's forthcoming sports network.
While losing the Dodgers or not getting them would hardly break giants like NWSA and TWC, the possibility certainly signals an evolving landscape change. Companies not only owning the team, but the media outlet(s) that broadcast the team's games. The Canadian Broadcasting Corporation (CBC) in Canada, for example, is likely concerned over the prospects that Rogers and Bell will leverage their joint-ownership of the Toronto Maple Leafs:
The Corp.'s biggest cash cow is Hockey Night in Canada - and HNIC's world revolves around the Toronto Maple Leafs. What happens if Rogers and Bell, which own the country's two biggest sports networks and now Canada's most important hockey franchise, decide they want the Leafs on Saturday night for themselves?
As partners in the Leafs, did it not just become a lot easier for Bell (TSN) and Rogers (Sportsnet) to team up and wrestle the Saturday night package from CBC?
CBC's biggest competitors just bought themselves a spot at the NHL table and, you would think, some influence over what will happen with the national television rights (think Comcast in the U.S. owning NBC, Versus, etc., and the Philadelphia Flyers and locking up the national rights for 10 years).
Yes, think Comcast (CMCSA) owning the Flyers as well as the national rights to carry the team's games. And don't forget about Madison Square Garden (MSG), which owns the arena the NHL's Rangers and NBA's Knicks play in as well as the networks that broadcast their games as well as those two teams and others.
While the Magic Johnson/Dodgers' deal might not have direct implications for investors, those with keen eyes and ears will pay attention. In my articles, I riff quite a bit about investing on the basis of a vision for the future. It's tidbits like this should help investors weave together a predictive narrative. In a nutshell, look for the companies positioned to dominate the media landscape not last week, this week or next week, but for the remainder of decades and centuries.
Using this type of lens, I am not sure how RCI and BCE do not make the top of every investor's list. I've said it dozens of times on Seeking Alpha and millions of times in my newsletter. The "socialist" Canadian government allows an almost unprecedented situation to flourish in the country. Rogers and Bell - dominant telecommunications companies, sports franchise owners and media giants with a ubiquitous stamp on an entire nation and a foothold in many advertising spaces, particularly the emerging multi-platform arena.
I am long both stocks and, if they traded 2014 LEAPS options, I would be long those as well. I do not care for close-in options on either name, specifically because some sort of near-term margin pressure, given the required spending in the wireless segment and on acquisitions, would not shock me.
Because it's not possible to find an equivalent to Rogers and Bell in the "capitalist" United States of America, you've got to tread a bit more carefully. I would love Verizon this (arms open wide) much more if there was a chance in heck it could merge with, say, CMCSA or somebody, but that's probably not happening for regulatory as well as other more company-specific reasons. Same goes for any meaningful M&A involving MSG, which would look really, really nice as part of Time Warner's (TWX) stable.
That said, I go for smaller scale U.S. equivalents of Rogers and Bell. I am long TWX, given the company's wide array of holdings. For the same reason, I love Disney (DIS) and keep an eye on another company with room to move, Liberty Media (LMCA), another firm that could swallow up an MSG or something like it in three seconds flat. For those reasons and because they're likely to exhibit growth and expand further on their own, we're going long MSG next week in the custodial account I just set up for my daughter.
Additional disclosure: On Tuesday, I will purchase shares of MSG in a custodial account for my daughter.