UPDATED: Rockets and Astros Broadcasting Partnership Sues Comcast (w/ Lawsuit PDF)
UPDATE 6/12/15: Gene Egdorf, an attorney for the Lanier Law Firm representing the plaintiff, appeared on my radio show on SportsRadio 610 yesterday. He says CSN Houston was a partnership doomed from the very start, and that after misappropriating the bankruptcy process, Comcast on nine separate occasions told the Rockets and Astros the company would be making a bid on the network that would make the teams whole. Those bids never came.
When Comcast Sports Net Houston was launched in October 2012, the hope was that it was the dawning of a new day for sports television in this city. The game coverage of the Houston Rockets and Houston Astros, who were also partial owners of the network, would be supplemented by eye popping pre- and post-game shows, along with detailed local sports news reporting the likes of which this city had never seen before.
Unfortunately, the rousing aesthetic success that was the actual on-air product (CSN Houston won numerous Emmy Awards in its two year existence) was only distributed to 40 percent of the Houston market during its entire existence — not surprisingly, that 40 percent was comprised solely of the homes with Comcast as their cable provider. That existence ended in the fall of 2014 with a sale of CSN Houston to AT&T and DirecTV for pennies on the dollar, and the subsequent conversion of CSN Houston to the far less glitzy ROOT Sports Southwest.
With that sale, finally, just in time for the 2014-2015 NBA season, most of Houston was able to view the Rockets and Astros, but not without the two primary teams involved having to endure two years of public relations nightmares, a sea of red ink and calendars full of bankruptcy proceedings.
CSN Houston was a joint venture between the Rockets (which owned approximately 31 percent), Astros (46 percent), and Comcast (22 percent). The business plan was simple — the Rockets and Astros were the primary content providers for over 250 nights a year, while Comcast would deploy its notable clout in the cable community to secure carriage deals with other cable and satellite providers. The money would flow, and everyone would be happy and rich.
At least, that's how it was drawn up on paper. In reality, things could not have played out more differently.
To that end, in a lawsuit filed this morning in Houston's federal bankruptcy court, the joint broadcasting partnership of the Rockets and Astros (Houston Regional Sports Network, L.P., referred to as "Debtor" throughout the lawsuit) and its bankruptcy trustee contend that Comcast engaged in a calculated effort dating back to at least 2013 (and possibly as far back as 2010) in which they intentionally tried to devalue CSN Houston so they could eventually purchase its key asset — Rockets and Astros broadcasts — all to itself for a drastically deflated price. According to that lawsuit:
"On information and belief, by 2013 (and potentially as early as mid-2010), Comcast decided that, instead of working to make the Debtor successful, it would do everything in its power to acquire for itself the Debtor’s primary and most valuable assets: the right to telecast programming related to the Houston Astros and Houston Rockets, and the right to receive revenue from affiliation agreements with MVPDs that carry CSN Houston (collectively, the 'Assets')."
In the lawsuit, we get a glimpse into the stressful dynamic that existed virtually from launch, wherein Comcast, whose primary role was to secure distribution agreements with carriers (referred to as "MVPD's" throughout the lawsuit), was either deficient in doing so or arranged deals that were well below financial expectations. We see early on that the Astros, in particular, had major issues with the Comcast's inability to get the network carried on other providers like AT&T, DirecTV, and DISH Network.
The lawsuit maintains that in November of 2012 Comcast's NBCU unit, which was the arm of Comcast responsible for securing affiliates to carry the network, pitched an agreement with a "major MVPD" at rates "significantly below" those in the original business plan, so low that they would have crippled CSN Houston. The Astros in particular took issue with the numbers, and for all intents and purposes, recommended Comcast Services/NBCU go back to the drawing board. This was the first major storm cloud in what became a two year flood.
The lawsuit, for all intents and purposes, accuses Comcast of sabotaging CSN Houston, its own network, so that it could devalue it to the point where the Rockets and Astros would have no choice but to sell their stake and their key asset (broadcast rights to their games) for a markedly deflated price to Comcast themselves:
"Failing to formulate a new business plan was not the only way Comcast sabotaged the Debtor’s business. Comcast Services/NBCU had the means and resources to negotiate affiliation agreements at higher rates, but intentionally chose not to do so."
"...In fact, Comcast had indicated to the Debtor that it would use its strength in other markets to get carriage for CSN Houston at financially viable rates. Yet, when negotiating with MVPDs regarding carriage for the Debtor, Comcast Services/NBCU did not leverage this market power as they indicated they would. Comcast did, however, on information and belief, employ this strategy with its other Comcast RSNs. For example, on information and belief, in January 2013, Comcast entered into a global deal with Suddenlink that incorporated every network in Comcast’s portfolio except for CSN Houston. Comcast never brought this potential deal to the GP Board. Indeed, the Debtor did not find out about the Suddenlink deal until after it had been entered into.
The joint ownership of three groups with varying agendas — the Rockets, the Astros, and Comcast — always seemed to make for a rickety partnership, at best, and the lawsuit seems to bear this out. While most of Comcast's RSNs around the country were 100 percent Comcast-owned, CSN Houston was not, and therefore, the lawsuit alleges, Comcast treated it more as a vehicle to eventually own the broadcast rights of the teams at vastly deflated prices than they treated it as a mutually beneficial business venture:
"Comcast’s reason for prioritizing and providing a higher level of service to the other Comcast RSNs than it did for the Debtor is clear: money. On information and belief, Comcast owned most, if not all, of the equity in those other Comcast RSNs, while it only owned 22.5% of the Debtor. Thus, Comcast Services/NBCU (and their affiliates) had a greater financial incentive to promote and obtain distribution for the Comcast RSNs than it did for CSN Houston. But an even greater motivating factor was Comcast’s desire to obtain the Debtor’s Assets for itself. Comcast knew that the best way to acquire these Assets at a low cost would be to financially cripple the Debtor so that it would have no choice but to sell itself to Comcast. Thus, on information and belief, Comcast Services/NBCU intentionally and willfully failed to negotiate and obtain the best possible carriage rates for the Debtor."
The lawsuit takes us chronologically through the ensuing financial strain on the teams, which really began to heat up in spring of 2013. As only 40 percent of the city was watching its teams, the Astros and Rockets proposed selling their stake back to Comcast for the market value they'd all invested at the outset. Comcast, though, allegedly slow played the teams and allowed the network to wallow into bankruptcy, thereby further devaluing it:
"Unsurprisingly, due to Comcast’s actions and omissions, in early to mid-2013, the Debtor experienced liquidity constraints. And just as Comcast had hoped, by April 2013, the Astros and the Rockets had proposed to sell their 77.5% equity interest in the Debtor to NBCU based upon the original implied enterprise value of the Debtor (i.e., $700 million). On information and belief, Comcast did not want to pay that price and instead bided its time, allowing the Debtor to become even more financially distressed, in the hopes that it could get what it wanted at better terms.
By the end of 2013, the bankruptcy court appointed the Astros a second time as lead negotiator to try and secure carriage agreements and/or a buyer for the network. However, the fact that the network was in bankruptcy was an inherent blow to any attempt to salvage a decent asking price because it made the network look unstable to potential buyers.
Furthermore, the lawsuit alleges, as time wore on, Comcast's offers to buy the Astros' and Rockets' share of the network — which previously had included vague promises of fulfilling back debts, broadcast rights owed, and value to shareholders — no longer included all of those assurances. The offers just kept getting worse and worse, like this one in early January that was delivered by Robert Pick, an official with Comcast who is named as one of the defendants in the lawsuit:
"On or around January 6, 2014, Pick sent a letter (the 'Offer Letter') to Rockets GP Board Director Brown, in which he reiterated Comcast’s intention to bid for the Debtor:
Comcast’s position throughout this matter, beginning with the pleadings it filed for the appointment of a trustee that accompanied the filing of the involuntary petition, has been that it is prepared to make a bid to acquire the Network, thus ensuring that the Network could successfully reorganize in bankruptcy. Although the passage of time and other events have affected the valuation, Comcast Owner remains prepared to make a ‘stalking horse’ bid for the acquisition of the Network. [emphasis in original].
In the Offer Letter, Pick described that the stalking horse bid would (subject to a reasonable aggregate cap) satisfy in full all prepetition secured, administrative, priority and general unsecured claims, including the amounts necessary to cure existing defaults under the Media Rights Agreements. Notably, in contrast to its prior promises, Comcast was no longer offering to bid an amount that would result in a “material” or “significant” distribution to the Debtor’s equity holders.
Eventually, in February 2014, the bankruptcy court issued an Order of Relief, which the lawsuit claims was Comcast's desire all along, and when this happened, Comcast allegedly stopped communicating with the teams on a proposed acquisition and allowed the network to sink further into its sea of red ink:
"As soon as Comcast got what it wanted (i.e. the Order for Relief), it suddenly became very quiet with respect to its proposed acquisition of the Debtor. When the Rockets and the Astros reached out to Comcast to get specifics, Comcast became evasive. It ignored the Rockets’ and the Astros’ requests for additional information and, as a stall tactic, instructed them that the Debtor would need to hire its own counsel before Comcast could move any further with the deal. The Debtor hired its own bankruptcy counsel on or around February 25, 2014. The Debtor’s counsel continued the effort to finalize the deal with Comcast. But Comcast continued to stall. This continued for approximately six weeks".
From there, Comcast made a public announcement on or around March 17, 2014, that they were no longer interested in buying the network. However, the lawsuit filed Thursday asserts that this was done not because Comcast truly had no intention of buying the network, but instead to devalue the network even further so they could get an even more favorable price tag:
"Indeed, on information and belief, at the time the Notice was filed, Comcast still had every intention of purchasing the Debtor (or substantially all of its assets), just not at the price it had previously promised. And it did not want to have any competition driving up the price. On information and belief, by filing the Notice publicly, Comcast was intentionally sending a false message to potential third-party purchasers that it was no longer interested in purchasing the Debtor because, in Comcast’s view, the Debtor had little to no value. As Comcast was intimately involved with the Debtor, a reasonable potential purchaser would believe that Comcast had superior knowledge regarding the Debtor’s value."
Eventually, spring became summer, and any hope of the Rockets and Astros getting a reasonable purchase price from Comcast ended with what the lawsuit calls a "lowball offer" from Comcast in early June 2014 that would not even pay the network's creditors in full, let alone give any return to the equity investors. On top of that, Comcast wanted the two teams to accept deflated media rights fees going forward, adding further value to Comcast and poisoning the relationship further for the Rockets and Astros. Ultimately, the rejection of this deal by the teams sent the network spiraling further into bankruptcy, further into debt. The value of the network itself continued to plummet.
With the relationship between the teams and Comcast irreparably damaged, the Rockets and Astros sought out a new buyer, an effort which eventually ended with AT&T and DirecTV acquiring the assets of CSN Houston and converting it ROOT Sports Southwest. By the time the deal was done, not only were the network's original shareholders not replenished, but there wasn't even enough to pay creditors:
"While Comcast may have failed in its ultimate plan to acquire the Assets for itself, it certainly succeeded in severely damaging the Debtor and its Estate along the way. Comcast’s wrongful conduct put the Debtor in a far worse position than it would have been in otherwise. Had Comcast lived up to its repeated promises, the Debtor’s prepetition claims and administrative expenses would have been paid in full and its equity holders would have received a significant distribution. But instead, under the DTV/AT&T Deal, the Debtor’s unsecured creditors and equity holders received no money on the Effective Date. Additionally, on information and belief, the terms of the DTV/AT&T Deal were significantly less favorable to the Debtor than they would have been if Comcast had not publicly filed the Notice.34 In fact, the DTV/AT&T Deal provided less value to the Debtor’s Estate than the Debtor would have received if it had just liquidated (or sold all of its assets) in September 2013. Under either scenario the Debtor would have lost the Assets and ceased to exist. But in September 2013, the Debtor had significantly less debt than it did at the time the Plan of Reorganization was confirmed. Instead, the prolonged bankruptcy proceedings, resulting from Comcast’s wrongful conduct, caused the Debtor’s Estate to incur a substantial amount of additional debt and increased the exposure of the Debtor’s creditors."
The lawsuit alleges Comcast's engagement in multiple counts of fraud in its actions over the course of the past few years, and seeks multiple varieties of damages and litigation costs:
For these reasons, Plaintiff asks that the Court issue citation for Comcast Defendants to appear and answer, and that Plaintiff be awarded a judgment against Comcast Defendants for the following:
a. actual damages;
b. nominal damages;
c. exemplary damages;
d. equitable relief, including but not limited to, fee forfeiture, disgorgement, and/or constructive trust;
e. prejudgment and post-judgment interest;
f. court costs;
g. attorney’s fees; and
h. any and all other relief, in law and in equity, both special and general, to which Plaintiff is entitled.
It's unclear in the suit just how much the plaintiff seeks or could receive with a favorable judgment, and perhaps more importantly to sports fans, it doesn't outline how any damages from a favorable verdict would flow to the teams, if they would at all. This is likely a bigger issue for the Astros than it is the Rockets, as the network was never a "lifeblood" proposition for Les Alexander's team.
Far more, the network was viewed as essential to the financial health of the Astros, in large part because of how baseball's financial pie is allocated. In the NBA, TV revenues are proportionally much higher on the national level (ESPN, ABC, TNT) than the local level. Baseball is the reverse, with local broadcast rights being a vital revenue stream. It's believed this is one reason why Jim Crane always seemed more adamant about needing a favorable per subscriber price from the various MVPD's than the Rockets were.
You can read the 64 page lawsuit in its entirety here:
Listen to Sean Pendergast on SportsRadio 610 from 2 p.m. to 7 p.m. weekdays. Also, follow him on Twitter at http://twitter.com/SeanTPendergast.
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