What Do the NBA’s Partners Stand to Lose?

After NBA players rejected a new proposal from owners yesterday and began the process of disbanding the union, the NBA’s many partners are facing the loss of at least 10 games due to a work stoppage that could continue throughout the entire season.

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According to a Standard & Poor’s report, each of the NBA’s partners, from media companies to municipalities, has a different relationship with the league. National and local media partners are facing a loss of programming and advertising revenue, while municipalities, which own most NBA arenas around the country, may see local tax revenues decline as arenas remain dark on would-be game nights.

While Standard & Poor’s believes that a short-term shutdown will not significantly affect the NBA’s partners, “the impact may change if the entire season is lost,” according to a report issued on Tuesday.

All cable and broadcast networks are owned by larger media conglomerates that Standard & Poor’s says “have sufficient critical mass and liquidity to absorb any potential short-term damage.” While advertising revenue and audience ratings will take a hit, S&P estimates that, “assuming affiliate fees remain intact…profitability at the cable networks could modestly increase despit a potential lost season.”

However, Standard & Poor’s warns that, should audience ratings not bounce back after an eventual resolution, the longer-term impact would be significantly larger. Among the companies with the largest exposure to the lockout are: Walt Disney Co. (NYSE:DIS), 0wner of ESPN and the ABC television network; Time Warner (NYSE:TWX), owner of Turner Broadcasting and the TNT cable Network; News Corp. (NASDAQ:NWSA), owner of Fox and Fox Sports Net; and Comcast (NASDAQ:CMCSA), owner of NBC and Comcast SportNet.

The NBA lockout won’t have the impact that did the NFL work stoppage, since the NBA lockout primarily affects cable networks as opposed to broadcast networks. Cable networks receive 50% or more of their total revenue from affiliate fees paid by multichannel video programming distributors, or MVPDs, such as cable system and satellite direct-to-home operators. For regional sports networks such as Fox Sports Net and Comcast SportNet, this percentage can be closer to 80%, leaving them less exposed to advertising revenue.

Cable networks’ distribution agreements with MVPDs stipulate that they will still receive their affiliate fees, even if games are not aired. However, in the case of a protracted lockout, S&P believes that some MVPDs could push for a temporary reduction in those fees, which means cable networks could lose a significant portion of revenue.

And because advertising revenue is weighted more heavily toward the back half of the NBA season, a settlement in the first half of the season would be less costly. S&P believes that networks could forgo a portion of NBA ad revenue, substituting games with programming that is likely to have much lower audience ratings, but that also costs less. Of course, a protracted lockout would result in much steeper losses.

Of course, networks aren’t the only players affected by the lockout. “Most NBA arenas are municipally owned and operated by a private entity,” according to the S&P report. “Of the NBA arena facilities that Standard & Poor’s rates, about two-fifths are financed, at least in part, by tax exempt debt. A handful of the arenas were built with debt secured solely from project, or arena, revenues.”

These projects rely upon short-term revenues, such as food and beverage sales, as well as long-term, contractually obligated income to fund operating expenses and debt obligations. Though most of these projects were structured with sufficient liquidity to withstand a loss of games, the cancellation of the entire 2011-2012 season would be harder to absorb, especially when adding other losses directly tied to NBA games, such as hotel and sales taxes, into the equation.

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“We believe the impact of the work stoppage may be worse if the owners and players cannot agree to a new collective
bargaining agreement and the entire season is lost, especially for the project-financed arenas,” concludes the S&P report. However, “considering the league’s business profile, we believe that if the NBA can successfully realign its revenue and expense structure and alter its revenue sharing agreements as part of the labor negotiations, the league’s long-term credit profile would improve.”