Diamond Sports calls in mediators as it pushes toward a reorganization plan

The courtroom continues to heat up for Diamond Sports Group, the largest owner of regional sports networks.

On Thursday, a bankruptcy judge approved Diamond’s request to bring in mediators as it is negotiates with creditors to reach a reorganization plan. The company said in court papers it needs to meet “substantial plan progress” ahead of the start of the upcoming NBA and NHL seasons in October.

“I think sports are part of the fabric of America, and many fans out there from day one want to know how and when their teams are going to play,” said Judge Christopher Lopez during Thursday’s hearing, adding all parties should participate in the discussions to reach a resolution.

Two judges from the U.S. Bankruptcy Court in the Southern District of Texas — Judges David Jones and Marvin Isgur — will preside as mediators.

Last week, Diamond won court approval to extend the period of time it has to come up with a reorganization plan.

Diamond sought bankruptcy protection earlier this year, burdened by more than $8 billion in debt and the significant headwinds hitting the regional sports networks business as more consumers cancel their cable subscriptions in favor of streaming.

The company and some of its creditors at earlier points in the case, including during a hearing last week, “have indicated that mediation could help [Diamond] sort through myriad issues they must confront on the path toward reorganization.”

Diamond has until Sept. 30 to file a reorganization plan, weeks ahead of the opening of the 2023-24 NBA and NHL seasons. It is vital for Diamond to continue carrying local games on its networks. Since its filing, it has already seen some teams leave its Bally Sports channels due to a breakdown in rights fees discussions.

The prospect of local game rights being up for grabs has attracted broadcast station owners – including Nexstar Media Group, Gray Television and E.W. Scripps Co. – looking to carry the games, CNBC previously reported. The Phoenix Suns recently exited a Bally Sports network for such a deal.

Besides shedding its hefty debt load, Diamond is looking to reset some of its rights deals with teams to reflect so-called market rates.

Last week, a lawyer on behalf of the NHL said the league was in constructive discussions with Diamond, but that “time is of the essence” ahead of the upcoming season.

During the bankruptcy process so far, Diamond has faced numerous conflicts – including an ongoing battle with MLB over teams’ streaming rights and rights fees that has led to Diamond dropping some teams from its Bally Sports channels and its recent lawsuit against parent company, Sinclair.

On Wednesday, Diamond unveiled the details behind the lawsuit.

In 2019, Sinclair acquired the portfolio of networks – previously known as Fox Sports – from Disney for $10.6 billion, a required divestiture that was part of Disney’s buyout of Fox Corp.’s 21st Century assets.

Diamond’s more than $8 billion debt load stems from the deal, which also imposed between $400 million to $650 million in debt payments, the company said in court papers.

In the few years since, Diamond’s business, pay-TV providers and other cable channels have experienced accelerating deterioration in their business.

Diamond is now alleging that the ownership of Sinclair only exacerbated its problems.

In court papers, the company said Sinclair has been “milking” Diamond for more than $100 million annually in management fees since the acquisition, despite knowing the dire state of the business. On top of this, Diamond alleges Sinclair, in a “nefarious strategy … wrongfully caused Diamond to transfer more than $1.5 billion in cash and other consideration for the benefit of Sinclair.”

This occurred as Diamond alleges Sinclair knew the RSN business was “careering toward bankruptcy, and it continued after Diamond was unquestionably insolvent.”

“Sinclair has been informed of a lawsuit filed by Diamond Sports Group in connection with their ongoing bankruptcy proceeding. We firmly believe the allegations in this lawsuit are without merit and intend to vigorously defend against them,” a Sinclair spokesperson said in a statement.

Diamond appointed a new board and leadership last year to run its RSN business as it faced an inevitable bankruptcy filing. Diamond is now an unconsolidated and independently run subsidiary of Sinclair.