Why Paying Up for YES Network Makes Sense for News Corp.

Why Paying Up for YES Network Makes Sense for News Corp.
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As expected, News Corp. is acquiring a 49 percent equity stake in the Yankees Entertainment and Sports Network, known as the YES Network.

A source close to the situation said the deal values the company at $3.8 billion at a valuation my sources tell me is around $3 billion.

Under the terms of the deal, the Yankee Global Enterprises, Goldman Sachs, Providence Equity, and others will reduce their stake in the deal. News Corp. said that the deal, which is subject to Major League Baseball's approval, is expected to close by the end of this year.

The deal gives News Corp. the option of increasing its ownership stake to 80 percent, buying out Goldman and Providence, and leaving Yankee Global Enterprises with the significant minority stake.

This plays into News Corp.'s larger strategy of owning the majority of its sports assets—it already owns 18 regional sports networks. The company has been building up strength in regional sports, pushing it towards creating a national cable sports channel like Disney's ESPN. (Read More: News Corp. Tops Estimates, 'Well Positioned for Growth'.)

The YES Network is certainly not cheap—the price of sports assets continue to climb, with the Los Angeles Dodgers selling this year for $2.15 billion—but YES is a key asset. The fact that it's focused on New York means it's in the nation's largest and most valuable media market.

According to SNL Kagan it draws almost $3 per subscriber per month. That's one of the highest fees on the country, but YES still has room to grow as its contracts come up for negotiation in the next few years. It's still almost $1 less than the $3.95 Time Warner Cable charges for its channels that carry the Los Angeles Lakers.

YES is particularly appealing for News Corp. as it prepares to spin off its less valuable publishing assets next year. It makes sense for News Corp. to invest some of its $12 billion in cash and cash equivalents (as of the end of September) in growing its most profitable and largest business: cable network programming. (Read More: News Corp. Confirms Plan to Split in Two.)

Barclays' Anthony DiClemente said he sees "revenue synergies from News Corp. negotiating on YES' behalf in carriage negotiations, incrementally improving both News Corp.'s and YES' bargaining power."

DiClemente pointed out that the network is projected to generate $500 million in revenue and $250 million in EBITDA this year, according to SNL Kagan. He said that the passion sports fans have for their teams "provides News Corp. with leverage in securing higher affiliate increases at its other networks."

This deal is notable for another reason for News Corp: James Murdoch, Rupert Murodch's son and the company's deputy chief operating officer, also sits on the board of YES.

James Murdoch was quoted in News Corp.'s press release: "This is a tremendous opportunity to enhance News Corporation's industry-leading portfolio of sports properties…"

Though Murdoch has left his position overseeing the company's British papers in the wake of the U.K. phone-hacking scandal, this deal indicates how he'll grow his power as he oversees the company's U.S. TV channels. (Read More: James Murdoch Eyes Expanded US Role .)

Jonathan Nelson, CEO of Providence said in a statement: "From a start-up in 2001 to the largest regional sports network in the U.S., this has been a remarkable achievement. We have appreciated our partnership with the Yankees, YES management and our co-investors, and enjoyed contributing to YES' success. We believe YES has a very bright future in the years ahead."

—By CNBC's Julia Boorstin; Follow her on Twitter: @JBoorstin

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