Sinclair's Diamond Doesn't Shine... But Sinclair Does

Summary

• Sinclair has managed to reduce the damage from its catastrophic RSN purchase by repurchasing Diamond Sports preferred shares, which were guaranteed by Sinclair's Broadcast TV division.
• This reduces Sinclair's losses on the RSNs by $850 million to $1 billion.
• Sinclair will still take heavy losses on the RSNs, but they will now probably be smaller than the book value of the company.
• Once the RSN bet is off the books, Sinclair's broadcast division should generate enough income to justify a share price in the mid-to-high $20s.
• If all goes well, it's conceivable a return to $36, near the pre-RSN $39.

One of the more unusual, experiences I have had in my time on Seeking Alpha was in one of my Sinclair Broadcast Group (NASDAQ:SBGI) articles when I and a few of my readers started quibbling over the precise legal terms within certificates of indenture and the precise listing requirements for SEC bond tables. What made such an esoteric debate worth having was that it was key to understanding just how bad a hole Sinclair was in with its sweeping, almost “bet the company” RSN purchase.

While doing so, however, I also realized that Sinclair management may be about to concede it made a bad purchase with the RSNs - and may have found a way to limit the worst of the damage.

Six months on, there's no longer any “may” about it - management has successfully managed to (partially) extract itself from its disastrous acquisition and shifted some considerable portion of the losses from Sinclair to the bondholders of Diamond Sports, Sinclair’s bankruptcy remote RSN subsidiary. Since this reduction in losses of roughly $1 billion is a very substantial portion of the company’s book value, I took another look at its financials and came away far more impressed than my previous visits to the opaque world of SEC filings.

The Key To Sinclair

The key to all of this, and what we were arguing about six months ago, relates to the $1.025 billion of preferred shares in Sinclair’s bankruptcy remote holding company, Diamond Sports Group. Those shares, which are owned either by JPMorgan Chase (JPM) or some other third party, constitute one part of Sinclair’s investment in Diamond, the other being $1.4 billion in cold hard cash Sinclair injected into the new venture, receiving in exchange substantially almost all of the common equity of Diamond. This investment is, as I said, bankruptcy-remote from Sinclair’s core company, which

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in SBGI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.