Comcast Accused Of Deliberately Sabotaging Houston Sports Channel

The purpose of this screengrab isn't just to show what the CSN Houston website used to look like, but to remind myself that the Phillies occasionally won a game.

The purpose of this screengrab isn’t just to show what the CSN Houston website used to look like, but to remind myself that the Phillies occasionally won a game.

Comcast Sportsnet Houston, which had exclusive access to Houston Rockets and Houston Astros games, was on the air less than a year when it was forced to declare bankruptcy in 2013. Not even a year later, the station — once valued at $700 million — was sold off to a joint venture of DirecTV and AT&T for a whopping $1,000. A new lawsuit accuses the cable company of deliberately submarining CSN Houston.

The suit [PDF] was filed earlier today in a federal bankruptcy court in Texas by a trustee overseeing the bankruptcy settlements.

“[Y]ear after year, Comcast is consistently ranked amongst the worst in customer service in the country,” reads the complaint. “But individual customers are not the only ones who have borne the brunt of Comcast’s bad behavior.”

Starting in 2010, Comcast partnered with the Rockets and Astros to work together on a new regional sports network, of which Comcast owned 22%. The complaint alleges that, rather than work to fulfill its end of the bargain, “Comcast did everything in its power to financially impair the Debtor so that Comcast would have the leverage to acquire the Debtor’s greatest assets (i.e., the right to broadcast Astros and Rockets games, and related programming) for itself at a significant discount.”

According to the suit, Comcast repeatedly promised but failed to reach deals with other pay-TV providers that would have put CSN Houston in a sufficient number of homes to make a profit. The plaintiff contends that Comcast chose to use its leverage in the national market to obtain a reasonable rate for the Houston station.

“[I]n January 2013, Comcast entered into a global deal with [cable provider] Suddenlink that incorporated every network in Comcast’s portfolio except for CSN Houston,” alleges the complaint, which claims that Comcast never brought this potential deal to the partnership’s board, and that the plaintiff only heard about the Suddenlink deal until after it had been completed.

Because Comcast only owned a 22% stake in CSN Houston, compared to its outright ownership of most other CSN regional operations, the plaintiff says the cable giant lacked incentive to prioritize the Houston channel. Additionally, the plaintiff claims Comcast was making unilateral decisions without the other partners about what was in the best interest of CSN Houston.

More importantly, according to the suit, Comcast was allegedly out to get Astros and Rockets broadcasting rights 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,” reads the complaint, stating that Comcast and its NBC Universal subsidiary “intentionally and willfully failed to negotiate and obtain the best possible carriage rates for the Debtor.”

By April 2013, only months after the station’s launch, the Astros and the Rockets proposed to sell their 77.5% equity interest to Comcast, but at a price based on the original $700 million valuation of the network.

“Comcast did not want to pay that price and instead bided its time,” allowing CSN Houston to sink further into dire financial straits, claims the plaintiff.

By the summer of 2013, the station was no longer able to make its media rights payments to the Astros, who considered CSN Houston in default.

“Smelling blood in the water,” according to the suit, Comcast met with the Astros and Rockets in early August 2013 to propose buying the Astros’ 46.5% equity interest in the station for around $185 million. This would give Comcast nearly 2/3 control over the station.

When the Rockets requested the same sort of deal (which was only based on a value of $500 million by this point), Comcast refused, per the plaintiff’s version of events. Since the Rockets needed to approve the sale of the Astros’ equity, this scuttled the entire deal.

The lawsuit accuses Comcast of using bankruptcy to sink the value of the station even further. “Comcast would then publicly announce its intention to bid a substantial amount of money to acquire [CSN Houston],” states the complaint. This public gesture would, in theory, scare off other potential investors and allow Comcast to buy all of CSN Houston’s assets “at a steep discount from what it publicly promised.”

When Comcast informed the Rockets of its desire to file for bankruptcy, the plaintiff recounts that the team said it would agree, but only if Comcast made a bid for the network close to the $500 million valuation. Comcast refused.

Because Comcast needed unanimous consent of the partners to declare bankruptcy, the only option was to have other Comcast affiliates file an involuntary bankruptcy petition, in which they claimed they were trying to prevent the Astros from terminating their media rights agreement with CSN Houston.

“But the Astros had not actually confirmed that they would terminate the Astros Media Rights Agreement,” contends the plaintiff, “on the contrary, the Astros were still negotiating in good faith for the sale of their equity… to Comcast.”

The lawsuit states that on the day that bankruptcy petition was filed, but before it was actually given to the court, Comcast’s CFO was sent an e-mail from the Astros with a draft of terms of sale. The baseball teams claims to have “had no idea” that the involuntary bankruptcy was coming.

After the petition was entered, Comcast made public its interest in buying out the other partners’ equity in the network. In an Oct. 2013 filing, the company said that closing such a deal by year’s end “would likely lead to full payment of all pre-petition creditors’ claims and all reasonably foreseeable administrative expenses, and also lead to a material distribution to equity holders.”

The Astros subsequently talked to potential buyers, including AT&T, DirecTV, Time Warner Cable, Fox, and Dish, but claim that none wanted to be involved in the bankruptcy and that there was a general understanding that Comcast was going to buy CSN Houston.

Meanwhile, the Astros also say that when documentation was needed to negotiate with a potential bidder, Comcast failed to turn it over in a timely manner.

The Rockets eventually took over as lead negotiator but claim to have run into similar issues with potential buyers wanting to become involve in the bankruptcy.

By January 2014, Comcast was still declaring its intention to try to buy CSN Houston.

“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,” reads a letter sent by Comcast to the Rockets at that time.

However, this time Comcast’s discussion of an offer no longer mentioned any possibility of a material distribution to equity holders. When pressed for clarification, Comcast allegedly failed to respond to either team.

The next month, DirecTV told the Rockets it was willing to make an offer that was equal to Comcast’s, but not any more. Believing that Comcast still intended to pay a reasonable amount for the network and not wanting to incur the additional cost of shifting to entirely new ownership, the Rockets turned down the DirecTV deal.

Finally in March 2014, Comcast dropped the bomb that it was no longer interested in buying out its partners in the channel.

“Comcast initiated this bankruptcy proceeding in the belief that the chapter 11 process would permit the Network to reorganize, thus preserving the Network’s value,” reads a statement from Comcast at the time. “Much has happened, however, in the nearly six months since this involuntary case was filed. In view of these developments, Comcast is no longer prepared to purchase the Network.”

The plaintiff contends, however, that “there had been no material change” in the network’s finances or circumstances in the weeks since the company had last expressed its goal of purchasing CSN Houston.

“[B]y filing the Notice publicly, Comcast was intentionally sending a false message to potential third-party purchasers that it was no longer interested in purchasing” CSN Houston, argues the complaint. Given that Comcast was a significant partner in the channel with intimate knowledge of its finances, the plaintiff sees Comcast’s public declaration of lack of interest as an attempt to convince other potential buyers that there was zero value in the network.

In spite of its statement that it was no longer interested in bidding on CSN Houston, Comcast allegedly continued to make overtures that indicated it still intended to purchase the network.

The complaint claims that in the spring/summer of 2014 Comcast’s attorneys requested a call with the general counsels for the Rockets and Astros.

“On that call, Comcast’s counsel proposed an offer that was significantly less than the amount Comcast had previously represented it would offer,” reads the complaint. A subsequent bid from Comcast was so low, according to the plaintiff, that the network’s creditors would not have been paid in full, leaving nothing for either team.

“Moreover, Comcast expected the Rockets and Astros to add additional value to the Debtor by taking significantly less in future media rights payments,” claims the suit. “Comcast knew that such a condition was a nonstarter for the Astros and the Rockets, whose consent was necessary for such a deal to get done. And without a deal, the Debtor would continue to languish in bankruptcy, incurring more and more debt along the way.”

In the end, CSN Houston was sold to AT&T and DirecTV, who now carry Astros and Rockets games on the Root Sports Southwest network. The lawsuit contends that everyone would have been better off simply liquidating CSN Houston when the bankruptcy petition was filed in Sept. 2013.

The lawsuit doesn’t put any dollar amount on its claims, but as the Houston Chronicle notes, a loss to Comcast could result in a payout of several hundred million dollars.

For its part, Comcast is denying the allegations in the complaint, telling Bloomberg that “The lawsuit is entirely without merit.”

Meanwhile, the Astros are in first place in the American League West. At least now people can watch them on TV.