We got a guest post today. A couple of months ago, I wrote a retrospective on the McCourts’ purchase of the Dodgers in 2004. Steve Parsons wrote a very good comment (you should read it) and I asked him to write a full response. Parsons has worked in sports business for years and currently writes for rotocommunity.com.
Amid the embarrassingly public divorce of the McCourts, the calls from Peter O’Malley to sell the franchise and the possibility of a court-ordered sale as part of the dispute over ownership (complete with a whodunnit tale of lawyers swapping clauses in a post-nuptual agreement), there is a cloud over the Dodgers immediate future.
What’s sad is that this didn’t have to happen. Back in 2004, several potential buyers made a bid on the Dodgers, including the McCourts, former Commissioner Peter Ueberroth and billionaire philanthropist Eli Broad.
The McCourts’ bid was problematic to begin with. Baseball gave them an exclusive window in which to complete the deal and it was immediately obvious that the family, who had recently failed in a bid to take over Frank’s hometown Red Sox, had no cash with which to make the purchase. The McCourts, as it turned out, would have to take out loans and otherwise leverage nearly the whole amount–they provided less cash than a veteran middle reliever’s salary to the project.
Baseball has strict rules regarding a teams debt-to-equity ratios and the McCourt deal violated these rules. So Commissioner Bud Selig made an exception to the debt-equity rules and allowed the McCourts to take, in addition to other loans of a similar amount, a $200 million loan from NewsCorp (the Dodgers’ owner) that would count as equity, by having the loan made to one of Frank McCourt’s development entities using its assets as collateral rather than those of the Dodgers. In retrospect it was lucky the league made such an exception. NewsCorp and the McCourts eventually sold most of the parking lot for just over $200 million.
Broad’s offer by contrast was almost entirely cash. The sole part of his $430 million dollar offer that was not cash involved an $80 million dollar loan from NewsCorp (or a $16 million dollar credit on the purchase price). Broad, unlike McCourt who had left a trail of failed projects, isn’t known for defaulting on loans.
The divorce papers show that the Dodgers are now encumbered with $433 million dollars in debts, or slightly more than what the McCourts “paid” to acquire the Dodgers. That doesn’t include the $200 Million dollars that the family and NewsCorp settled on for the sale of 24/25ths of the parking lot. The Dodgers have been repeatedly turned down for refinancing, are under restrictions from their primary creditors as to how much deferred compensation they may take on and are running on a business plan that only allows them to stay afloat if they sell 3.8 million tickets each and every season (a figure they have reached only once in their history).
None of this needed to be the case. The Dodgers currently are extremely profitable, generating $72 million in operating revenue in 2009. But they’re saddled with such debt that whoever owns the team must pay $28 million in debt service and an additional $34 million in revenue sharing. The Debt-to-equity rules are totally gone. The McCourts have even mortgaged the parking outside Chavez Ravine. They’re not necessarily draining the franchise of every penny of cash and leaving the creditors, the team and the fans to pay the bills, but given the recent findings in the courtroom, it’s hard to imagine they weren’t.
Early predictions, including my own, thought that the McCourts would have to sell the franchise within 3-5 seasons. I leaned on the latter end because right about now marked the end of the period (about five years) wherein new owners may take advantage of baseball’s sweetheart tax-exemption deal that’s part of it‘s special relationship with anti-trust laws. It’s been five seasons and the only thing that’d prove this wrong is if the divorce proceedings get drawn out.
Why was McCourt allowed to buy the Dodgers? Selig may have felt an obligation to McCourt as he evidently did to Jeffrey Loria for the way in which the Red Sox sale was handled (John Henry’s bid was financially worse than the primary competitors bid, but was hand selected for approval by Selig). Loria’s Marlins ownership is widely seen as a quid pro quo for not pushing the anti-competitive nature of that sale. McCourt also owned extensive parking areas in Boston that Selig may have thought could be used to build a new, higher capacity park for the Red Sox (at government expense; under Selig, teams don’t pay for their own parks, even if they must lie about their finances to get the deal as was the case in the Marlins new stadium where the Marlins lied about their profits according to team documents obtained by Deadspin).
More troubling given the current financial mess was the waiving of the debt to equity rules. The basic idea that an ownership group must have the capital to buy and to run a franchise. The Brewers, which had been owned by the Selig family (not Alan “Bud” Selig himself), were clearly afoul of those rules themselves. The Brewers, under Selig himself, had taken out loans from an organization run by the late Carl Pohlad, the owner of the Minnesota Twins. At the same time, Selig was trying to arrange for Pohlad to gain hundreds of millions of dollars from baseball to contract the Twins – and what a good move that would have been for baseball. Was Selig unwilling to enforce the debt-to-equity because of his and his family’s own situation?
Ultimately, the Dodgers are still a profitable franchise. Even after the debt service, the Dodgers reported an $8.4 million profit for 2009. If a solvent owner can be found, the Dodgers can begin the process of unwinding the labyrinthine debts and encumberments that may be the McCourts’ lasting legacy once the bitter taste of their ownership has worn off. But whoever takes over the Dodgers will have to deal with a franchise that has been sucked dry of cash and is mortgaged to the hilt and beyond. Or worse, one or the other of the McCourts might retain the franchise and the ever-accelerating race to bankruptcy will start anew.
Somewhere, Eli Broad has a bitter smile on his face. Dodgers fans, and indeed baseball fans, are left with just the bitter.