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Home Pete Toms Is Selig to Blame for Franchise Debt Problems in MLB?

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Is Selig to Blame for Franchise Debt Problems in MLB? PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Monday, 21 February 2011 18:28

Baseball and moneyMLB is prospering. Despite the recession, revenues have grown to almost $7 billion annually. The two most recent franchise sales, the Rangers and Cubs, saw both fetch staggering amounts. Like him or not, the biz of MLB under commissioner Selig has been a spectacular success for both owners and players. (I’ll leave the debate of whether Selig has transformed the role of Commissioner into COO, and the merits of that, to others more philosophical) Much of Selig’s success has resulted from his unification of the owners. While his critics decry MLB ‘s clandestine process of transferring ownership of franchises to FOBs (Friends of Bud), Selig long ago ended the inter-ownership battles that contributed greatly to baseball’s lengthy and harmful labour interruptions. But while the biz of MLB has continued to flourish despite the financial meltdown, some individual franchises have been left in vulnerable positions due to the debt problems of their owners. When Hicks Sports Group, a holding company of former Rangers owner Tom Hicks, defaulted on debt payments it led to the Rangers franchise eventually filing for bankruptcy. More recently, the well documented personal financial problems of the Mets owners Fred Wilpon and Saul Katz, along with those of Dodgers owner Frank McCourt, have led to speculation that both those franchises might also become ensnarled in bankruptcies. LWIB saw commissioner Selig criticized in the media for allowing franchises to become burdened by the broader financial problems of their owners. In fairness to Selig, ownership of an MLB franchise is typically more complicated than it was as recently as the 90’s. Franchises are but one part of a business model that is also dependent on both media and property development rights. The exponential growth in franchise values, which Selig deserves some credit for, also has resulted in clubs comprising an ever greater share of their owners’ overall financial worth. Going forward, some say it is essential and imminent, that MLB will attempt to implement new rules to protect franchises from the debt troubles of their owners. Whether or not the owners will be amenable to these proposals is a potentially sensitive matter. So, lets have a look at what is being said, starting with Josh Kosman’s report LWIB for the NY Post that some wonder if the Mets situation is the Rangers redux.

Banks that provided roughly $400 million in loans to the New York Mets are starting to unload some of that debt at a discount, a sign that creditors are getting nervous about the team's finances, The Post has learned.

Potential buyers are bidding around 90 cents on the dollar for the debt, sources said. At least one creditor has bought a debt slice at a discount with the approval of Major League Baseball, which must sign off on any buyer of the team's loans, said one source.

"This tells me the original lenders are scared," a source close to the situation said.

AND

One source said MLB is holding up trading in the loans because of concerns that vulture investors will snap up the debt and force the team into bankruptcy -- just like they did last year to the Texas Rangers.

"[MLB] is being very difficult," the source added.

SELECT READ MORE TO SEE THE REST OF THIS ARTICLE

In light of the rampant speculation surrounding the financial health of the Mets and Dodgers (obviously, two of MLB’s crown jewel franchises), LWIB Ben Klayman of Reuters wrote a piece titled Baseball needs to strike out owners' debt issues. Within the piece, both on and off the record sources directly blamed MLB (Selig) for allowing the Mets and Dodgers to become exposed in their owners’ debt problems.

The off-the-field struggles and heavy debt loads of so many major-market teams' owners have some industry observers questioning the league's stewardship.

"It's either an unfortunate set of circumstances or it demonstrates a consistent failing at Major League Baseball to monitor the ownership of its clubs on an ongoing basis," said Marc Ganis, president of consulting firm Sportscorp Ltd and an adviser to Tribune Co in its 2009 sale of the Cubs.

Baseball, like many sports, saw fans and corporate backers trim spending during the recession, but owners suffered as well. Many are businessmen who used debt to invest and got in over their heads, putting the fates of their profitable teams in question.

"It's not the teams that are distressed, it's the ownership," said a sports banker, who asked not to be identified discussing team finances.

AND

"An issue that will be on the table in 2011 will be upstream holding company debt. There's no doubt about that," said a senior baseball official, who asked not to be identified discussing financial matters usually addressed by Selig.

Klayman’s piece goes on to explain that imposing tighter rules on the non-baseball finances of league owners is easier said than done. Present and potential owners might be offended by MLB’s invasiveness which former commissioner Fay Vincent speculated could lead to more franchise ownership by large corporations. As well, franchise values could be negatively impacted by tighter rules governing owner debt.

While LWIB saw industry insiders take to the media to discredit and criticize MLB for its role, in their opinion, of allowing franchise owner debt to become the problem it is, there is speculation that somebody at 245 Park Ave. already “took the fall” last year. In December, the SportsBusiness Journal reported that the Rangers sale, eventually settled via auction brought about by bankruptcy, was a factor in the departure of the formerly most second powerful executive at MLB, Bob DuPuy. “The contentious transaction, however, sullies the image of MLB in the financial community, and is believed to play a role in the autumn departure of league President & COO Bob DuPuy.”

The SportsBusiness Journal recently published an opinion piece from NYU sports business professor Robert Boland examining what the Mets situation reveals about the more volatile state of present day pro sports ownership. Professor Boland warns that the “big 4” should expect more of the same.

The first lesson about franchise ownership drawn from the Mets situation: The margin for error for any owner has shrunk to the degree that one big mistake — trusting Madoff — combined with other decisions, made with good intention but without great success, can threaten to cost one of the more stable ownership groups in all of sports its franchise. The most unsettling part is that the Wilpons and the Mets are not alone. They have company, whether it is the seemingly impervious Los Angeles Dodgers or the perpetually challenged New Orleans Hornets, and for the strangest reasons.

AND

Perhaps the next lesson of franchise ownership is to recognize that teams can no longer be kept at arm’s length from the rest of an owner’s portfolio. They are simply too valuable now.

This folds into the third lesson: that teams are targets. Given their huge valuations, franchises will be the target of creditors, especially when they overreach trying to jump to a higher foothold. The Wilpons and Mets had seemingly done all the right things in trying to grow their business: starting SportsNet New York, signing expensive free agents and building a stadium. Yet it’s these decisions, coupled with the Madoff thefts, that have left them vulnerable.

AND

…But when Madoff’s embezzlement hit the Wilpons’ cash reserves, compromising the operational liquidity of the Mets — which had already been stretched thin by otherwise “good debt” from the new stadium, RSN and a high payroll — the fragile nature of franchise ownership in 2011 was revealed. The perfect storm may have hit the Mets, but that storm is still off the coast waiting for another team pushing the boundaries of fiscal restraint. So the next lesson may be that these crises may simply not be avoidable.

Ironically, MLB realized in the early part of the last decade that their industry had a problem with club debt. (Not the debt of its franchise owners) The 2002 CBA negotiations included changes which drastically reduced the amount of debt clubs were allowed to carry. Several years later, when the credit crisis arrived, MLB appeared prescient. In March 09, MLB CFO Jonathan Mariner told CFO Magazine:

I like to describe that era leading up to the 2002 Collective Bargaining Agreement as a time when we were financing player compensation and whatever growth we were realizing through debt. There was a lot of available debt, very cheaply priced. We put in place the most critical element of that CBA, a debt-service rule. The debt rule said that what used to be balance sheet, ratio-based debt would become EBITDA-based debt. It also said the debt cannot exceed more than ten times EBITDA.

Most people say, "ten times EBITDA, that's a pretty big leverage factor." But not if you consider that most clubs didn't even have positive EBITDA. We had a lot of work to do. But putting that rule in place basically forced clubs to focus on earnings and, as a result, slowed the pace of payroll growth. Payroll has still gone up every year for the most part, but the pace of growth is more in line with revenue growth.

I don’t know if Selig should have to accept the blame for the messes created by Hicks, Wilpon, Katz and the McCourts. I’m not saying yes or no. But it was evident LWIB that he will likely be forced to at least try to assert some control over the broader financial decisions of his owners. The owners won’t like it but that doesn’t mean it won’t happen. Ultimately they all became members of this private club called MLB because Selig favoured them over others. Over the decades that has fostered a lot of loyalty towards the commissioner and he will certainly need it as he addresses this sensitive, and important, matter.


Pete Toms is senior writer for the Business of Sports Network, most notably, The Biz of Baseball. He looks forward to your comments and can be contacted through The Biz of Baseball.

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