Yankee Cable Deal Stranded on Third; Boss’ Guy Dickers

Remember how George Steinbrenner used to have back-door negotiations with Billy Martin that seemed more like Truman and Stalin at Potsdam than a managerial hiring? Mr. Steinbrenner’s at it again, only this time he’s in pursuit not of a field manager but a cable C.E.O., and not Billy the Kid, but a 53-year-old cable veteran–probably not bound for the Baseball Hall of Fame–named Leo Hindery.

All summer long, Mr. Steinbrenner has been locked up in stuffy Manhattan conference rooms in pursuit of the economic entity he means to make his defining moment as keeper of the Yankee brand: the establishment of the YankeeNets cable-television network. No balmy evenings in the Bronx, no leaning on Joe Torre, no banter with Derek Jeter–just all-day talks with bankers and lawyers and cable guys.

And even as the baseball team pushed on, getting rolled by the Mariners, beating the Blue Jays and squishing the Red Sox, sources close to the matter say that Mr. Steinbrenner’s YankeeNets team has encountered some unexpected delays in signing up Mr. Hindery, its proposed chief executive, late of TCI. Mr. Hindery’s steep demands with regard to compensation and a financial stake prolonged the talks as the bankers chafed. Those involved in the deal say it may finally close this week, with Mr. Hindery on board. George Steinbrenner generally gets his man, and this is his dream–a Yankee network all his own.

“It’s a 99 percent possibility that the deal gets done,” said one source. Nevertheless, March 2002 is six months way, and as it stands right now, the Yankees have no programmer or agreement with the cable companies to distribute their games next year.

Early in August, the deal was close. Steve Rattner’s Quadrangle Group and Goldman Sachs were prepared to invest more than $300 million combined for what was expected to be a 30 to 40 percent stake in the channel, with the majority stake to be held by the Yankees. Cable big shot Amos Hostetter was on board as a likely chairman and investor. And Goldman Sachs bankers, with whom Mr. Hindery has had a long relationship, were on the verge of enlisting him to run the new network. He seemed to be the perfect George Steinbrenner employee–like the late, great Billy Martin, a manager whose bluster, ego and track record made for an almost poetic fit.

Mr. Hindery also came advertised as a buddy of Chuck and Jimmy Dolan, and had served briefly on the Cablevision board, where he and the Dolans bonded over their Jesuit upbringings. “No other guy in the cable industry is as close to the Dolan family,” said one source involved in the talks.

The 53-year-old Mr. Hindery gained his industry renown and considerable wealth fairly recently. In 1997, he facilitated the sale of John Malone’s cable giant, TCI, to AT&T. He left AT&T’s cable unit six months later, selling loads of stock along the way. He spent seven months at the telecommunications provider Global Crossing before moving on, having sold off the company’s Internet assets. He is the investment banker’s dream C.E.O.: An ex-Wall Streeter, he lives for the deal, is always on the prowl for the next one.

So, Mr. Steinbrenner’s bankers argued, who better than Mr. Hindery to horse-trade with the Dolans, Time Warner’s Gerry Levin and Comcast’s Brian Roberts? He would be perfectly placed to ensure that the Yankee channel be included as part of the basic-cable programming package by the three main regional operators and get the widest possible viewership.

But the crux of the issue with Mr. Hindery became the money he himself was going to put into the deal: a substantial–though undisclosed–sum, he assured the YankeeNets team. As the talks progressed, however, Mr. Hindery retrenched, those close to the matter say. Mr. Steinbrenner and his bankers wanted Mr. Hindery for the long run–and tying up a big chunk of his cash in the deal would be the golden handcuffs to do it. Nevertheless, they settled on a lower sum, even as Mr. Hindery’s intractable, somewhat abrasive negotiating techniques made some involved in the deal ask if he was really worth what he said he was.

But the question remains: Can Mr. Hindery and the network deliver? For the Yankees network to bring in the hundreds of millions in licensing fees and advertising dollars it expects, and to justify the approximate $800 million valuation being ascribed to it–the network will also be paying over $50 million a year in rights fees to the Yankees–the cable operators must carry the network as part of their basic programming package.

And to do that, Mr. Levin, Mr. Dolan and Mr. Roberts will need to shell out between $1.35 to $2 per subscriber to what would be the region’s third sports network, after MSG and Fox Sports Net. But with sports-programming costs already on the rise, the big operators are now muttering to themselves that this is where they must draw the line in the sand. They have been hammered repeatedly in the past for passing such costs along to the consumer. There comes a time to say no and, says cable-sports analyst John Mansell of Paul Kagan Associates, “If you are Cablevision or Time Warner and you are already paying a lot for two regional sports networks, you are not going to be standing in line to cooperate and put the Yankees on basic programming. You absolutely want to put them on a premium service, a digital service or even pay-per-view.”

Meaning Mr. Levin and Mr. Dolan might carry the channel, but only as an à la carte offering, so that Yankee fans would have to pay extra for the privilege, just as they do for HBO or Showtime. Yankee fans would surely be irate, but the operators would counter that Mr. Steinbrenner was asking for too much–that it’s something they had to do to hold the line on their customers’ cable bills.

For Mr. Steinbrenner and his network, such an outcome would be ruinous. Ad dollars would be minimal, revenue projections for the new company would shrivel, and the uproar that would ensue as fans and sports columnists vented their spleen would not help his chances of getting city officials to greenlight a new stadium.

Enter Leo Hindery.

Although talks with the operators have yet to commence, the spin has always been that Mr. Hindery, with his relationship with Mr. Dolan and his son Jimmy–who swapped a Cablevision stake for a chunk of TCI subscribers with Mr. Hindery in 1997–would see to it that the network would find a home as part of a basic-cable package.

“These will be a defining series of negotiations for the sports-programming industry,” said Richard Aurelio, a former Time Warner cable executive. “Steinbrenner has to realize that he can not be seen as being greedy.”

The cable operators are a little nervous as well. They know full well that Yankee fans and the sports columnists would blame them and their greed for pushing the Yankees off of basic cable and into HBO territory. Indeed, Mr. Dolan Sr. has been through this one already. In 1988, he became a public enemy for blacking out the Yankees, Knicks and Rangers in a failed gambit to offer MSG–he did not yet own it–as a premium channel.

And next year, with his MSG network minus the Yankees, Mr. Dolan will be pressured by Mr. Levin and Mr. Roberts to decrease his steep $2.50-per-month fee. And for Mr. Dolan, there is a scarier possibility: that the Yankees will cut a broad deal with Time Warner for $2 a subscriber. Because operator agreements are done on a most-favored-nation treatment basis–whoever cuts a deal first, the others must fall in line for the same price–the Dolans would both receive less from the operators for MSG and be forced to pay out more to the Yankees. Cash flow would be sure to suffer.

“We understand that a lot of our customers want Yankee games,” said Time Warner cable spokesman Mike Luftman. “We expect to have negotiations with YankeeNets that we hope will result in our being able to provide games to our customers at a reasonable price.” Cablevision declined to comment.

As for YankeeNets, they, too, are not commenting. Mr. Steinbrenner has always felt that no one but he understands the true value of the Yankee brand. And his enduring genius has always been to use other people’s money to fund his obsession: limited partners–”There is nothing more limited than a limited partnership with the Yankees,” a former partner once said–the Dolans, New Jersey Nets owners Lewis Katz and Ray Chambers, junk-bond investors. These are the people who have been paying those famous Yankee salaries–from Catfish Hunter through Derek Jeter.

It all started 30 years ago, when Mr. Steinbrenner and 17 of his Cleveland buddies ponied up $10 million for a then-struggling franchise. Twelve years ago, he sold the Yankee cable-TV rights to the MSG Network for $483 million, spread out over 10 years. People couldn’t believe it–$500 million for Yankee TV rights! But as far as Mr. Steinbrenner was concerned, it was MSG and its eventual corporate parent, Cablevision, that was taking him to the cleaners.

Last year, MSG paid the Yankees $50 million for the rights to broadcast games. Madison Square Garden’s operating-cash flow for the year was $170 million, much of which came from ad dollars and licensing fees. But, Mr. Steinbrenner, his bankers would tell him, Cablevision may be paying you $50 million a year, but they’re taking in over $100 million in cash every year by leveraging the Yankee rights. Look at Cablevision’s stock price: $90 last year–16 times cash flow. Rights fees are chump change; what you need is some of that equity, his bankers argued.

As the contract drew near its end in 2001, the Yankees talked with Cablevision about a possible equity stake.

“The opportunity to use your programming to create equity and distribution is very attractive,” says Bob Gutkowski, president of Magnum Sports and Entertainment, who as head of Madison Square Garden in 1988 negotiated the 12-year cable deal. “It’s an opportunity that not a lot of teams have. The Yankees are doing exactly what MSG did 30 years ago: creating their own network and owning the distribution.”

All sorts of ideas were aired, including a stake in Cablevision. No, said the Dolans. This was a family company, and while Mr. Steinbrenner and Mr. Dolan–two septuagenarians from the Cleveland suburbs who found everlasting fame and fortune in Manhattan–did have much in common, he was not family.

In 1998, Mr. Dolan père came close to persuading Mr. Steinbrenner to sell the Yankees to him. Mr. Steinbrenner thought about it: Maybe he could take the money and stay in control of his beloved Yankees. There was talk in the press that he might even try his hand with the Knicks and the Rangers. Forget about it, came the response from Bethpage–when the Dolans buy an asset, they and only they control it.

Looking for leverage, Mr. Steinbrenner got it in 1998, when he was introduced to New Jersey Nets owner Ray Chambers. Like the Yankees, the Nets had a TV contract with Cablevision (Fox Sports Net) that would expire in 2001. They were free to negotiate a deal with another network once their deal ended.

The Yankees, though, were compelled contractually to allow MSG-Cablevision to match whatever deal they were offered after 2001, when their deal was up. The Nets just wanted a marketing alliance with the Yankees that might make the Dolans perk up a little when TV talks started up again. Mr. Steinbrenner was interested. Why bother with a marketing alliance when a full-fledged merger would give Mr. Steinbrenner exactly what he needed in order to walk away from Mr. Dolan: winter programming. And if the New Jersey Devils later came on board, well, all the better.

In February 1999, YankeeNets was born, valuing the Yankees at around $700 million and the Nets at $150 million. The Yankees were now more than a baseball team; they were a multimedia company.

The board of directors reflected this evolution: Mr. Steinbrenner, Rupert Murdoch’s son James, Messrs. Katz and Chambers, Bill Cosby, Lester Crown (one of the larger Yankee limited partners), real-estate investor Jerry Cohen, Donald Keough of Allen & Co., former ABC chairman Thomas Murphy, real-estate magnate Jerry Speyer, P.R. maestro Howard Rubinstein, Mr. Steinbrenner’s son Harold and his son-in-law Stephen Swindal. It was a shot across Mr. Dolan’s bow. Mr. Steinbrenner pocketed $135 million from the deal and would receive another $40 million a year later, when the company raised $200 million in junk bonds–but in the Boss’ eyes, that would be pocket change compared to what he would get when he started up his own TV channel.

“By controlling their own distribution,” said Neal Pilson, former president of CBS Sports, “YankeeNets would be keeping the net profit, and the judgment is that these profits will exceed the rights fee.” By March of 2000, YankeeNets bought the New Jersey Devils and were ready to say goodbye to the Dolans.

But Yankee baseball had made MSG the premier sports-cable network in the land, with over seven million viewers. The Dolans would not let the Yankees go without a fight, and there was that right-to-match provision to boot. Mr. Steinbrenner had a solution: He would give them an offer that they would have to refuse.

In July of 2000, YankeeNets announced an agreement with TWI, the TV programming arm of the sports-entertainment group International Management Group, to start its own network. YankeeNets would collect $899 million in rights fees from the channel through the 2010 season. Cablevision was free to match the offer or pay to the Yankees $1.3 billion up front, or $2.4 billion paid out over 10 years to keep the Yankees on MSG.

The Dolans were furious. The gall–$1.3 billion! Up front! That was more than a year’s cash flow for Cablevision. They sued, and the matter bounced around in the courts until this past April, when both sides agreed, finally, to part ways. Losing the Yankees would be a bitter blow for Mr. Dolan, but this was the man that had started up and then lost HBO–sometimes an asset becomes just too expensive and obstreperous to keep. Plus, he had a bid in for the Red Sox.

So Mr. Steinbrenner cut Mr. Dolan a check for $30 million this past April, and finally he was free to start up his own network.

But he needed more cash–not only for the network, but to help pay down some of the high-interest junk-bond debt YankeeNets had incurred.

Up stepped Mr. Rattner and the bankers at Goldman Sachs. Mr. Rattner had made much of his name banking for cable and media companies, and the media-telecom banking team at Goldman Sachs has long been the cream of the crop.

The investors knew full well that sports franchises, and their ability to attract eyeballs and advertisers, were the hot new trend in cable TV. Mel Karmazin at Viacom had recently paid $2.3 billion–20 times the cash flow–for Black Entertainment Television last fall. Walt Disney put down $3.2 billion for the Fox Family Network in July. Now they had a chance to get in on the ground floor with the premier sports brand in the world. And it wouldn’t be just baseball: For the 2002 season, the Nets would be included in the package, and by 2007 the Devils would follow. YankeeNets would spin cash if the cable operators followed.

The new channel will have its own leverage. Mr. Levin and Mr. Dolan have surely taken note of James Murdoch’s presence on the YankeeNets board. Mr. Murdoch heads News Corp.’s Asian satellite business; his father, Rupert Murdoch, is deep in talks with G.M. to pry lose Direct TV. Imagine this: Bye-bye cable, the Yankees can now be had only on satellite TV. Yes, Yankee fans would be screaming with rage, but the focus of their ire would be directed at Messrs. Dolan and Levin for having lost out to Mr. Murdoch. Which would be fine by Mr. Steinbrenner, as long as he gets paid.

However, before any of that, YankeeNets and its investors need to close a deal with Leo Hindery. He may not be Billy Martin, but he’s the necessary piece for George Steinbrenner to get his cable operation to the playoffs.