YANKEES GET CLOSER WITH AMAZON’S DIAMOND SPORTS BAILOUT DEAL.

The current proposed restructuring deal from Diamond Sports has an unusual condition that grants Amazon.com and the New York Yankees a road to near-parity ownership of the YES Network. Amazon may even be able to purchase a cheap stake in the New York-area RSN that transmits the Brooklyn Nets, Yankees, and WNBA team Liberty, depending on how Diamond performs.

Diamond Sports revealed a restructuring plan a week ago that called for the bankrupt owner of the regional sports network to raise about $1 billion through fresh investments from Amazon, a group of current debt holders, and a legal settlement with the company’s soon-to-be-former owner, Sinclair Inc. It’s interesting to note that, despite Amazon’s relatively small financial contribution to Diamond ($115 million upfront if the bankruptcy court approves the plan), the mega-retailer is demanding a high price, which may result in the mega-retailer forging closer ties with baseball’s most well-known team.

Amazon will pay $115 million towards a two-year convertible note in Diamond as part of the proposed agreement. In other words, Amazon will receive interest on its investment, or around $7.2 million annually, and its whole capital returned within a maximum of 24 months. If Amazon so chooses, it may convert its note into 15% equity in Diamond. Should it do so, it will be eligible for a bonus that will be discussed below. With its investment, Amazon will also have the option to purchase an additional $50 million worth of 10% of Diamond.

Studies of U.S. corporate bankruptcies show that businesses have a better chance of survival after Chapter 11 if they can cobble together a restructuring agreement like the one Diamond proposes. Still, the deal isn’t without risks to investors: A 2015 Harvard Business School working paper noted that two years after exiting Chapter 11, more than 6% of companies with restructuring agreements re-entered bankruptcy and another 10% were acquired. The paper doesn’t address acquisition values, but evidence suggests most of such acquisitions are under duress to avoid re-entering bankruptcy.

So, given there’s a not-insignificant chance Diamond won’t be able to stand on its own two feet for long, Amazon gets a nice asset to backstop its investment: Diamond pledges as collateral the 20% equity that it owns in the YES Network. The agreement makes clear the YES equity is dedicated to guarantee Amazon’s investment first: “The ‘YES Interests’… will hold no other assets and may not incur any liabilities or debt other than a guarantee of the Convertible Notes,” the term sheet with Amazon says in part.

This implies that Amazon may be able to take Diamond’s YES equity if Diamond fails to pay interest or cannot pay back the $115 million when it becomes due all at once after two years. What is the value of that? At $3.47 billion enterprise value, a group fronted by the Yankees repurchased the 80% of YES that it did not own in 2019. As a result, Amazon will get first choice over shares valued at around $700 million in 2019. The Yankees would likely claim that, in the present, they could sell YES for a significant profit over the 2019 asking price—Amazon could acquire a fifth of YES for a tenth of its actual worth.

Odds are Amazon won’t snag YES equity cheaply, but it may come nonetheless. For one, Amazon has to cooperate with any effort to sell the YES equity, which makes it unlikely Diamond stumbles back into bankruptcy and loses all the value of YES. But Amazon covers its bases: That option the company gets if the Amazon note is converted into equity? The right to buy all 20% of the YES equity at a fair market value. And Amazon will have that option until two years after Diamond exits bankruptcy, even if its $115 million note has been paid back in full.

As it stands today, the Yankees own 26% of YES, Diamond 20% and Amazon 15%, plus three owners of 13% apiece, according to data compiled by S&P Global Market Intelligence: asset management giant Blackstone, Abu Dhabi sovereign wealth fund Mubadala and sports-focused private equity firm RedBird.

It looks like one way or the other, Amazon will be 25% owner of YES in about two years’ time.