ESPN (DIS) and the NFL are reportedly engaged in advanced discussions regarding a potential equity stake, although the likelihood of a deal remains uncertain.
According to the NY Post, the talks have progressed to a point where owners and players are being informed, adhering to the revenue-sharing terms outlined in the collective bargaining agreement (CBA).
If materialized, the deal could potentially involve ESPN taking control of NFL Media. Both entities have refrained from commenting on the ongoing negotiations.
Wells Fargo analysts said the NFL is “seen as the most important sports league” for DIS investors as it can “command the highest rights prices.”
“A NFL/ESPN partnership cemented in equity would effectively underwrite ESPN as a key transition partner over the next 10+ years as the NFL likely moves from linear-first rights deals to streaming-first.”
Considering that the streaming shift likely implies new bidders such as Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), a potential partnership suggests that “ESPN has a critical role to play through the changes.”
“ESPN may be able to improve carriage of NFL Network and/or Red Zone, improving near-term cash flows (good for the CBA). ESPN DTC launching in est. CY24/CY25 could provide another testbed for games on streaming following TNF on Prime Video, SNF on Peacock (and linear) and AFC local games on Paramount+ (and linear),” analysts said in a note.
However, potential hurdles may arise, particularly concerns from owners. An equity deal with ESPN might be viewed skeptically as it could potentially put the NFL at a disadvantage in future rights negotiations with other bidders, raising concerns about conflicts of interest, Wells Fargo strategists added.
The analysts noted that investors do not anticipate an agreement between ESPN and any sports leagues, despite previous reports of talks last summer, to which neither party has provided official comments.
In essence, the potential for a deal between ESPN and a sports league represents a positive prospect, as it could contribute to an increased ESPN terminal value and decreased risk for ESPN Direct-to-Consumer (DTC) initiatives.
“We believe DIS sentiment has a higher floor on cost cuts, DTC margin improvement, ESPN DTC coming and FY24's strong FCF guide.”