Phillies' equity in CSN Philly worth an estimated $119 million

by David Murphy

Published Jan. 8, 2014, 5:25 p.m. ET

CORRECTION: I had originally stated that the Phillies' cut of ad revenue from broadcasts was not subject to the 34 percent revenue share. That is incorrect. Thanks for the heads up to Wendy Thurm, who does good work covering these TV deals across MLB.

As I noted yesterday, there is a faction of fans/media/pundits who want to believe that the Phillies could become the Dodgers or Yankees if they wanted to. And, frankly, I can't say for sure that they won't. Maybe Scott Boras is correct and the Phillies' new television contract is worth more in the neighborhood of $200 million per year. What I can tell you is what people who are paid to value this stuff believe. And none of it suggests the Phillies' liquidity will suddenly increase by multiple hundreds of millions of dollars per year once the new contract takes effect in 2016.

The guaranteed portion of the new deal has already been reported -- $2.5 billion over 25 years. Yesterday, we estimated that Year 1 would see the Phillies land a payment in the neighborhood of $78 million that would increase by two percent each year to offset inflation. However you slice it, it's an average of $100 million per year. Of course, the Phillies will earn more than that $100 million per year average thanks to two other components of the deal. The most valuable of these pieces is the 25 percent equity stake in Comcast SportsNet Philadelphia that the Phillies now hold, which isn't subject to the 34 percent share they must kick into MLB's revenue-sharing pool. The second piece is a cut of the advertising revenue generated during game broadcasts on CSN.

Without a doubt, the Phillies' equity stake is lucrative. But I'm not sure that it does much to increase their ability to dramatically expand payroll. According to estimates provided to the Daily News by the financial information firm SNL Kagan, a 25 percent equity stake in CSN Philly should currently be worth in the neighborhood of $119 million. This estimate is based on SNL Kagan's estimate of CSN Philly's cash flow ($34 million per year) combined with a multiplier of 14. But again, that's equity. An investment, essentially. That's not liquidity.

If CSN Philly achieved average annual growth of 10 percent over the life of the deal, the Phillies' stake would be worth $1.172 billion by the end of Year 25. That's an average of $46.9 million per year. Now, let's assume that CASH FLOW equals NET INCOME or PROFIT (which it doesn't), and also that CSN Philly pays the Phillies a dividend each year that totals 25 percent of NET INCOME (PROFIT). Under those terms, the Phillies would earn about $836 million in total dividends by the end of the deal. That's an average of $33.4 million per year. That would give the Phillies a total annualized return of $80.3 million on their equity in CSN Philly. So to reach Boras' $200 mil/year figure, the team would still need to generate $19.7 million per year from their split in the advertising revenues from game broadcasts. That might sound reasonable until you consider that SNY, which boasts nearly quadruple the cash flow of CSN Philly, generated a total of $40 million in advertising revenue for their entire network in 2011. So for the Phillies to reach the $200 million Boras mark, the set-up with CSN Philly would need to be something like a 50/50 split of all game broadcast advertising revenue, with the total ad revenue from 162 game broadcasts (roughly 1/16th of CSN's annual programing) equal to the total ad revenue generated by a network nearly four times its size.

For instance, let's say CSN Philly's CASH FLOW is $40 million in Year 1 of the deal, and all of that CASH is PROFIT, and all of that PROFIT is distributed in a DIVIDEND. The result would be an extra $10 million added to the Phillies' coffers. If the rights payment that year is $78 million, then $26.5 million of it belongs to the revenue sharing fund, leaving the Phillies with a total of $61.5 million from the TV deal at their disposal ($51.5 million from the TV deal, $10 million from the dividend) plus whatever advertising revenue they receive. That's compared with $23 million plus ad revenue under the old deal. So granting all of our assumptions, most of them extremely liberal, the Phillies are still only +38.5 million in Year 1 over where they were the year before. That's still significant. Right now, though, it looks like it's big impact will be enabling the Phillies to maintain their current payroll level despite attendance that has dropped by roughly half a million over the last two seasons.

Regardless, the only thing that matters to most fans is the TV Deal's impact on the Phillies payroll. And our point all along is that the impact is not nearly as big as proclamations of $200 MILLION PER YEAR!!!! would indicate.
For instance, let's say CSN Philly's CASH FLOW is $40 million in Year 1 of the deal, and all of that CASH is PROFIT, and all of that PROFIT is distributed in a DIVIDEND. The result would be an extra $10 million added to the Phillies' coffers. If the rights payment that year is $78 million, then $26.5 million of it belongs to the revenue sharing fund, leaving the Phillies with a total of $61.5 million from the TV deal at their disposal ($51.5 million from the TV deal, $10 million from the dividend) plus whatever advertising revenue they receive. That's compared with $23 million plus ad revenue under the old deal. So granting all of our assumptions, most of them extremely liberal, the Phillies are still only +38.5 million in Year 1 over where they were the year before. That's still significant. Right now, though, it looks like it's big impact will be enabling the Phillies to maintain their current payroll level despite attendance that has dropped by roughly half a million over the last two seasons.

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