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News Corp. to Buy Stake in the YES Network

News Corporation is reportedly set to buy a 49 percent stake in the YES Network and it may be a hedge against losing its local TV contract with the Dodgers.

The YES Network broadcasts Yankee games and a full slate of Yankees-related programming. It is also the broadcast home of the Brooklyn Nets of the NBA. YES is considered the most successful and profitable regional sports network in the country.

Over the weekend, the New York Times reported that News Corp. is close to acquiring a 49 percent share of YES, which has been valued for purposes of the transaction at $3 billion. A 49 percent share, then, will cost News Corp. $1.47 billion. Until now, shares in YES were divided among the Yankees (34 percent), investment banks Goldman Sachs and Provident Equity (40 percent) and a group of former Nets owners (26 percent). The deal includes an option for News Corp. to increase its stake to 80 percent within five years.

News Corp. is the parent company of Fox Sports, which owns 19 regional sports networks around the country. One of those regional sports networks is Fox Sports West, the current broadcast partner to both the Angels and the Dodgers. Last December, the Angels hit gold when they signed a new, 17-year contract with Fox Sports West valued at more than $2.5 billion. That deal gave the Angels tremendous financial flexibility when approaching the free-agent market. The result? A  10-year/$240 million contract for Albert Pujols and a 5-year/$77.5 million contract for CJ Wilson.

But the Dodgers’ deal with Fox expires at the end of the 2013 season and it’s unclear the two will continue as broadcast partners in 2014 and beyond. When former Dodgers owner Frank McCourt was going through federal bankruptcy, Fox proposed a new 20-year/$3 billion deal for the Dodgers, a deal which Commissioner Bud Selig ultimately rejected. The possibility of an even more lucrative TV deal provided the foundation for Guggenheim Partners’ winning $2.15 billion bid for the Dodgers in bankruptcy.

By the terms of the existing deal, Fox and the Dodgers are in a 45-day exclusive negotiating window that began on October 15. If no deal is reached, the Dodgers must then make an offer to Fox. If Fox rejects the offer, the team will be free to negotiate with any broadcaster. The most likely suitor is Time Warner Cable, which snagged the Los Angeles Lakers away from Fox last year. The Dodgers could also decide to start their own regional sports network, like YES, New England Sports Network (NESN/80 percent owned by the Red Sox), SNY (65 percent owned by the Mets), and Mid-Atlantic Sports Network (MASN) (majority owned by the Orioles, with a minority stake for the Nationals). More on MASN in a minute.

A media analyst for Los Angeles Times suggested that Fox/News Corp. pursued a stake in YES as a hedge against losing the broadcast rights to the Dodgers and to block Time Warner from a potential partnership with the Yankees. Whatever the motivation, the competition between Fox and TWC on both coasts will almost certainly lead to more riches for two of the richest baseball franchises: the Yankees and the Dodgers.

Now back to MASN. It was created as part of the deal that moved the Expos from Montreal to Washington, D.C. to become the Nationals. Orioles owner Peter Angelos opposed the move as an encroachment on the Orioles’ exclusive broadcast and commercial region. [This is different from the dispute between the Giants and the A’s over the territorial rights to San Jose and Santa Clara County.] As part of the negotiated settlement between MLB (which then owned the Expos) and Angelos, MASN was created with the Orioles to own 90 percent and the Nationals to own ten percent. The deal also called for the Nationals to be paid $20 million/year in broadcast rights, although that figure would increase by $1 million every season. In 2011, MASN reportedly paid the Nationals $29 million in broadcast fees and $7 million for its now 13 percent share of the network.

The MASN agreement also includes a re-set provision by which the Nationals can re-negotiate the broadcast fee structure every five years. Early in 2012, the Nationals proposed that MASN pay between $100 million and $120 million per year in broadcast fees. The Orioles countered at $34 million per year. The two sides have been in protracted negotiations ever since. Commissioner Selig asked representatives from the Pirates, Rays, and Mets to mediate the dispute. A resolution was expected over the summer but never materialized and the parties reportedly remain far apart.

The dispute highlights the growing disparity between the local-tv haves and have-nots. On one side are the Yankees, Mets, and Red Sox, which own their own networks, together with the Rangers, Angels, Dodgers, Astros, and Padres, which have or will soon have lucrative new broadcast deals. On the other side sit the other 22 teams, with contracts of varying lengths and financial terms, waiting to cash in. Next up to the trough are the Phillies, Mariners and Diamondbacks. Their broadcast deals expire after the 2014 season.

There’s been a lot of talk lately about the new national TV contracts MLB agreed to with Fox Sports, TBS, and ESPN. Those new 8-year deals, covering the 2014-2021 seasons, will pay MLB $1.5 billion annually, money that will be shared equally among the league’s 30 teams. So while local TV revenue differs significantly from team to team, national TV revenue should ameliorate some of those differences, right?

Maybe. Maybe not. The new national TV money — which will start flowing in 2014 — should, theoretically, give smaller-market teams the opportunity to sign free agents that were previously too expensive to consider. But, the market as a whole will be flush with cash. That could very well lead to faster-than-expected salary inflation. If so, the smaller-market teams will be right back where they started.