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Debt Structure in Cubs Sale Has MLB Worried PDF Print E-mail
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Written by Maury Brown   
Wednesday, 10 September 2008 07:56



With Sam Zell and the Tribune Co. looking for a tax-avoidance deal with the sale of the Chicago Cubs, MLB is worried that the buyer will have to borrow extensively, thus saddling the club with too much debt.

MLB has a firm debt-prevention policy in place in the 60/40 rule (a club cannot carry debt 40% above the asset value), but a deal for the Cubs may have MLB owners looking even closer at the sale structure given the franchise's iconic stature within the game. A debt-loaded Cubs organization would place constraints on matters such as player payroll.

The problem for Sam Zell and Tribune is that an outright sale would mean paying taxes in excess of $400 million. Tribune purchased the Cubs in 1981 for $20.5 million. With the combined sale of the Cubs, Wrigley Field, and a 25 percent stake in ComcastSports Chicago, the price should easily exceed $1 billion. As reported by the Chicago Tribune, Zell will be looking to get creative with the deal.

Instead, he wants to create what's known as a leveraged partnership between the buyer and Tribune to own the team. The partnership would borrow money to buy the team, and the proceeds from the loans would go to Tribune. The media company would retain a small stake in the partnership, less than 5 percent, giving it some exposure to the loans.

Under the terms of a leveraged partnership, only borrowed money can be distributed tax-free. Consequently, in some of these deals as much as 90 percent of the purchase price is financed with debt to maximize the cash payout, Willens said.

"When you set up a structure like that, it's costly," said a source close to one of the five remaining bidders who asked to remain anonymous. "The more debt you put on it, the more expensive it is. The more leverage, the more scrutiny you get from baseball."

Because of the leveraged partnership arrangement, the deal is not considered a “sale” even if Tribune receives money up-front. In doing so, Tribune would avoid capital gains taxes. Any sale completed this way would, for purposes of taxation, then occur 10 years into the future, or 2018, if the deal is completed this year.

It will be interesting to see how the owners respond to a deal structured this way – a deal that won’t be known until the purchase agreement is completed. With the tax-avoidance structure, the potential for a Sam Zell vs. MLB showdown could be in the offing. Look for the sale to occur sometime shortly after the World Series and possible approval by the 30 owners sometime shortly thereafter.


Maury Brown

Maury Brown is the Founder and President of the Business of Sports Network, which includes The Biz of Baseball, The Biz of Football, The Biz of Basketball and The Biz of Hockey. He is contributor to Baseball Prospectus, and is available as a freelance writer.

Brown's full bio is here. He looks forward to your comments via email and can be contacted through the Business of Sports Network.

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