We put the deal through a structured analysis that will help you navigate your own complex negotiations
By Alim Bhanji and
Some deals are simple: you sell 1,000 desks, and the customer receives the desks. The price you set was based on how much it cost to make the desks and how much you think the customer will pay. But many deals are very complex: companies are still selling hard assets, but they are also selling options on future assets, intellectual property, contracts to sell items back to people who originally owned them, and rights to show things to others, on specific media properties, with specific restrictions and brand constraints, among many others.
Coming up with a winning bid for a complex asset is a thorny problem, and every deal is unique. At first glance, the recent $5.2 billion purchase by Rogers Sportsnet of the National Hockey League’s TV and multimedia broadcast rights seemed exorbitant. We put the deal through a simple framework to determine if the price was too high.
- How does the asset support a business’ overall strategy?
- What is the asset’s value to the business?
- What do we need to do to win the asset?
Understand the deal in the context of your strategy
Negotiating and executing large complex deals takes up a significant amount of time and resources. Before making a decision to invest in a deal, management should determine the degree to which the asset supports the firm’s overall strategy.
For Rogers, acquiring the NHL property aligns with its sports-centric content strategy. Sports content provides the last vestige of must-see programing. Owning this content is critical from an advertising perspective, which, given today’s technologies, spans multiple platforms, including mobile. By seizing control of Canada’s hottest sports content property, Rogers also had the opportunity to damage its biggest competitor: TSN. In short, investing heavily to win the NHL contract was a pretty smart move.
Quantify the direct and indirect value
Coming up with an estimate of value for a deal may not be easy, but it’s always possible.
The first step is to quantify each value lever. For Rogers, the main sources of direct benefit are advertising, subscription and sublicensing revenue. Its ad revenue per subscriber is about 45 per cent less than TSN’s, but its ratings are just 35 per cent lower, so Sportsnet can hopefully use the NHL deal to increase advertising rates to a comparable level.
Let’s do the math. Within three years, Rogers could earn an extra $200 million annually from advertising. It could also see a $20 million jump in subscription revenue from the Sportsnet and Sportsnet One channels, plus as much as $180 million from sublicensing NHL content to other networks. By the third year of the deal, Rogers will be paying the NHL an estimated $345 million annually, so it should still be ahead, even after accounting for production costs.
The second step is to understand the intangible benefits: how winning the bid will impact key rivals, how it will transform the industry and how it positions Sportsnet against long-term trends. With the NHL deal, we see Rogers reaping rewards that go beyond the amounts quantified above. Rogers’ non-sports channels can promote their offerings during hockey slots, and the entire business can capitalize on unique NHL branding and marketing opportunities. The biggest benefit may come from mobile, Rogers’ largest business. Rogers should profit from an increased number of mobile subscribers and incremental data usage.
Do what it takes to win
Sometimes you need to pay heavily to win. For Rogers, this meant topping a reported $5 billion offer from Bell Media/TSN and paying a much higher premium than recent comparable deals: 207 per cent more than the previous NHL contract, versus an average increase between 80 and 110 per cent for comparable North American sports television contracts.
It is critical to set a walk-away price before entering negotiations. It is easy to get caught up in the emotional roller coaster of a competitive bid, but doing your homework on value should allow you to go into negotiations with a confident view of what to offer, and how high to go before walking away.
While it is important to know what your competitor is willing to pay, don’t just throw more money at the target to win: you should also position yourself as the ideal partner. Rogers may have sealed the deal by convincing the NHL that it offered the widest distribution platform and the most compelling vision for supporting the league’s growth.
The $5.2 billion price Rogers paid to land the NHL contract feels like an exorbitant amount but, upon further evaluation, it looks like a sound decision.