Sunday, December 11, 2011

MLSE Sold Into An Unholy Alliance

On the morning of December 9th, a hastily planned press conference was called to announce that Canadian media arch-enemies Rogers and Bell Canada would be purchasing equal parts of a controlling share of Maple Leaf Sports and Entertainment from the Ontario Teachers Pension Plan in a whopping $1.32 billion dollar deal.

MLSE holdings consist of the Maple Leafs, Raptors, Marlies and TFC, the Air Canada Center, and control of BMO Field and Ricoh Coliseum. They also include the MasterCard Center for Hockey Excellence, stewardship of Lamport Stadium and Maple Leaf Square, housing RealSports bar and grill, RealSports Apparel and e11even restaurant. 3 specialty channels, Leafs TV, NBA TV Canada and GOLTV, and a recent deal to stream these channels to Xbox.

OTPP has agreed to sell its 79.53% share to the two media titans and The Kilmer Group, a firm which already held the remaining 20.47% of MLSE and is owned by MLSE chairman Larry Tanenbaum. The deal sees Kilmer increase its share to 25%, with Bell and Rogers taking 37.5% each. Bell will divide its share between BCE (28%) and the Bell Canada Pension Fund (9.5%). Bell and Rogers are paying $533 million each, and financing the balance.

This is where the details become murky, though not necessarily nefarious. The balance, $254 million dollars, may include Tanenbaum's own expenditure, or not.
In exchange for letting Rogers and BCE control the TV rights to Leafs and Raptors games, Mr. Tanenbaum will increase his stake to 25 per cent of the company when the deal closes. Sources say he will contribute some of his own funds to the deal, but his increased share in MLSE comes at a significant discount to what he would have otherwise had to pay in a traditional sale. - The Globe and Mail, Dec 9, 2011
Despite my best efforts, I am unable to ascertain how much Tanenbaum is doling out in this deal. The official OTPP press release confirms the sale of its stock, in full, to Rogers and Bell only. Tanenbaum's increase in ownership stake is an as-yet-unpublished side deal with his new partners. Part of this increase can be attributed to assurance that Tanenbaum will not exercise his right of first refusal and essentially block the deal.

The Globe and Mail estimates the savings accrued by Bell and Rogers not having to buy rights to Leafs and Raptors games at auction to be some $80 million. Given the sale price, one could theoretically value the price of Tanenbaum's increase in stock to approximately $75.2 million dollars. If based on enterprise value, that figure jumps to roughly $95.1 million.

Tanenbaum will also retain the position of Chairman at MLSE and will continue as governor for MLSE's respective teams in the NHL, NBA and MLS, including the NHL governor's executive committee. It's safe to say that Rogers and Bell both investigated their ability to buy the team outright, but found the cost prohibitive. Tanenbaum clearly benefited from his role as chairman, having insight regarding all offers made for the team when it was listed, and OTPP's requirements for sale. I would speculate that Tanenbaum pitted these competitors against each other in the bargaining, only to unite them in order to reach his own plum.

Savvy in business and media companies, Tanenbaum likely saw the writing on the wall in 2000, when Rogers acquired 80% of the Blue Jays, which it now owns outright. Tanenbaum, held a stake with the Leafs since 1996, and in 1998 engineered a deal with Steve Stavro to buy the Raptors and their arena project from John Bitove. The conglomerate was renamed MLSE, and the arena was redesigned to include hockey and opened in 1999 as the Air Canada Centre. MLSE launched Leafs TV and Raptors NBA TV in 2001.

The Raptors had familiarity with the Skydome, having played there since inception, and though the ACC was brand new and world class, the Skydome was capable of much greater seating. Rogers bought and renamed the stadium the Rogers Centre in 2005, while the Leafs bought their AHL affiliate and moved them to into the Ricoh Coliseum in Toronto. A year later MLSE was awarded an expansion franchise in the MLS, and the Toronto FC was formed, and would play in a newly built city facility adjacent to Ricoh Coliseum. BMO Field opened to host TFC's inaugural match in 2007.

MLSE had 4 teams in the Toronto market, and 3 of the city's 4 major teams. They also had two fledgling sports channels. It's likely they considered purchasing the Blue Jays and the Skydome in order to consolidate Toronto sports under one umbrella, an undeniable advantage, but likely found the returns on a floundering team diminishing, the costs of a stadium prohibiting, and a wealthy and powerful adversary in Rogers, which aired their channels and had the lion's share of the local television broadcast service provider market.

It is worthy of note that in 2005, a dedicated soccer channel named GOL TV was launched by Insight Sports, of which Kilmer Enterprises is a stakeholder. It is also worthy of note that in 2006, OTPP purchased 20% of CTVglobemedia, which had owned 15% of MLSE since 1993, and in 2007, led a group in an attempted $35.1 billion takeover of BCE. This deal, which would have been the world's largest, was eventually cancelled. In 2008, CTVglobemedia sold half its share in MLSE to Tanenbaum, and the balance to OTPP the following year, before being swallowed into BCE in 2010. Insight Sports sold their interests in GOL TV to MLSE in 2009.

Rogers had diversified its services before and throughout its ownership of the Blue Jays, extending from cable TV into high-speed Internet, cellular service, home phone service and home monitoring systems. Additionally, they operate some 51 radio stations in Canada, including the CHFI, SportsNet Fan590, JackFM and 680News, a literal horde of corresponding websites, and own or co-own 19 television channels (I believe) plus the Viewer's Choice pay-per-view channels. Interestingly, it was Bell that sold Rogers many of its assets, including the SportsNet networks, due to redundancy and CRTC competition regulations upon BCE's acquisition of CTVglobemedia.

Bell has done much of the same. From its roots in home phone service it has added cellular, Internet, satellite TV and new IPTV services. Bell owns or co-owns a staggering 59 (if I counted correctly) Canadian television channels, including the CTV line, MuchMusic and MTV, and TSN, no small clutch of websites and 35 radio stations, featuring TSN Radio, Flow and the Bob stations. Not to be outdone, Bell comes to the table as 18% owners of the Montreal Canadiens.

If these two companies sound alike, it's no coincidence. Both enjoyed monopolies while they were laying communications infrastructure, which eventually (and not coincidentally) became adaptable to carry each other's services, and what good is a conduit without content? Bell and Rogers have driven the local television station to near extinction, and have consolidated between them the majority of the airwaves as well. They control the medium and the message.

And now they control sport in the country's largest city. Competitors? To a degree, but with no small amount of collusion. You can find most Bell channels on Rogers TV, and vice-versa. Service prices are as similar as the services provided. Remember the Olympic Broadcast Consortium? Bell and Rogers networks, along with the CBC, as a kind of government funded stepchild. That stepchild will be shown the door as far as hockey broadcast rights go once their contract expires in 2 years, and not just for the Maple Leafs. In fact the only non-subsidized television network still able to realistically compete is Global, owned by Shaw. Rogers and Shaw have had long standing regional boundary agreements in order to maintain monopolies territorially.

There is definitely a pattern here. But it goes even deeper. Remember Insight Sports, and their shareholder, Tanenbaum's Kilmer Group? They own Game TV, a game show station, and the World Fishing Network. They also co-own the NHL network, with the NHL and Bell media. Tanenbaum has deftly manipulated his greatest competitor against one of his strongest allies in a game of media brinkmanship and has rendered them equals while advancing his own interests. Neither Bell nor Rogers lose, but Tanenbaum wins.

It's no surprise Tanenbaum told TSN that he guarantees a championship from the Leafs, Marlies, TFC, or the Jays, a team he has no authority over. If we have learned anything about Tanenbaum, it's that he builds empires and uses every opportunity to cross promote. I firmly believe the Jays and Rogers Centre will eventually join the MLSE fold. MLSE would be foolish not to pursue them and control the city's major sport and venue markets. Rogers would likely be enticed to join for increased promotion, greater network co-operation from Bell and perhaps pieces of Bell holdings like their stake in the Canadiens.

And Tanenbaum will preside over it all, increasing his wealth, power, stature and scope with the wealth of his competitors-turned-partners. Though Tanenbaum is the minority partner, his share is enough that he can sway to vote against Bell or Rogers well enough to keep them subservient towards him, if only to prevent one another from gaining an advantage. The CRTC would never permit the two to merge to topple him, and neither can afford to allow the other to buy their share of MLSE.

This is truly an unholy alliance. We will have nearly no choice in our selection of media. The same people will package the same content, streamed through the same networks to the same devices, for the same price. All the consumer will need to decide is if they prefer red or blue. City TV or CTV. Dreger or Millard.

Forget that, you'll just watch The Score, right? Think again! Kilmer, Rogers, Bell... it's all the same.

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