Home Pete Toms LWIB: More Blame for Selig over Club Debt Problems, MLBAM turns 10, NCAA “no-agent” Rule, plus Tidbits

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LWIB: More Blame for Selig over Club Debt Problems, MLBAM turns 10, NCAA “no-agent” Rule, plus Tidbits PDF Print E-mail
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Pete Toms Article Archive
Written by Pete Toms   
Tuesday, 29 March 2011 22:56

Last Week in Bizball by Pete Toms

This week in “Last Week in BizBall, more blame for Selig over MLB’s debt troubles, BAM turns 10, NCAA “no-agent” rule, plus tidbits.

MORE BLAME FOR SELIG OVER MLB’S DEBT TROUBLES

LWIB, Forbes published their annual valuations for all MLB franchises. Commissioner Selig must be proud. Despite the recession, Forbes estimates that the average MLB franchise value grew 7% over last year to a record high of $523 million. And you likely know that, again, despite the recession, industry wide revenues last year were a record $7 billion. The bullish outlook was bolstered by this report in the SportsBusiness Journal that MLB is forecasting a 3% to 7% increase in attendance this season. When the subject is the business end of MLB, it must be difficult to find fault with the commissioner’s performance, yes? Evidently not, as LWIB saw another round of Selig bashing in the media (see this LWIB from last month on the first round)

over his negligence in allowing some owners to pile up excessive amounts of debt on their franchises. Monte Burke wrote a piece for Forbes titled Inside Baseball’s Debt Disaster. Burke’s piece details the debt problems of the Dodgers and Mets, both marquee franchises, and lays the blame squarely on Selig for allowing the owners of both franchises to amass such debt on their teams. The report also criticizes MLB (ok, Selig) for allowing former Rangers’ owner Tom Hicks to circumvent rules governing franchise debt by loading it onto a holding company (Hicks Sports Group). HSG defaulted on $500 million plus of debt which eventually led to the Rangers being auctioned off in bankruptcy proceedings. From Monte:

…In numerous interviews with sports bankers and baseball insiders for this article and in preparing FORBES’ annual valuation of baseball franchises, worries over the consequences of debt in the league continually cropped up.

…The debt troubles could also make it more expensive for teams to borrow, dragging on the value of the entire league. At the very least lenders are likely to start demanding to be paid a little extra, now that some banks have been stuck holding on to Mets debt because of baseball’s restrictions on who can purchase it. “We are a pretty stupid industry, but eventually we will realize this paper should be yielding up by a couple hundred basis points,” says one banker.

MLB has indicated it may finally be ready to address some debt issues, but regulating owners is tricky. So far Selig seems unwilling to challenge owners who may resent any meddling in their finances.

The day following the publication of Burke’s Forbes piece, Josh Kosman reported in the New York Post that MLB (ok, Selig) has begun discussions with the MLBPA over changing the rules governing franchise debt:

The move, aimed at avoiding a Mets-like cash squeeze or a Texas Rangers bankruptcy-type scenario, will be centered on widening the definition of team debt, sources close to the situation said.

For example, MLB wants teams to include holding company loans and not just what is directly on team's books when determining total debt, a source with direct knowledge of the talks said.

The new debt rule would be part of MLB's collective bargaining agreement talks with the players' union -- talks that have just begun.

Monte Burke reacted to Kosman’s report: While the exact nature of the rule change is not yet known, it is worth noting that several Major League Baseball teams are currently carrying debt that’s more than 50% of their enterprise value. Those teams: the Mets, the Dodgers, the Detroit Tigers, the Chicago Cubs, the St. Louis Cardinals and the Washington Nationals.

Although I think Baseball’s Debt Disaster is an overstatement, Selig must find a solution. However, he walks a fine line in search of a structure that will be acceptable to both owners and PA. Tighter lending rules could have a negative impact on franchise values. League intrusion into the non-baseball finances of owners could result in more corporate ownership in MLB. The PA needs assurances that franchises can meet payroll and deferred compensation obligations but are also aware that owners’ capacity to borrow contributes to growth in both revenue and franchise values.

You might argue that MLB is a victim of it’s own success. The importance of the Rangers (Hicks Sports Group loan default), Dodgers (McCourt divorce) and Mets (Wilpon/Madoff) in the wider financial entanglements of their owners results from the enormous worth of these franchises. Last month, NYU sports business professor Robert Boland wrote in the SportsBusiness Journal that we should expect more of the same: 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…..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.

It has become evident this year that the conclusion of the Rangers’ bankruptcy did not mark the end of MLB’s debt troubles (it may have marked the end of Bob DuPuy’s stint as MLB’s COO). Reports this year indicate that it may have only been the beginning.

SELECT READ MORE FOR MLB ADVANCED MEDIA TURNS 10, NCAA 'NO AGENT" RULE, PLUS TIDBITS

BAM TURNS 10

MLBAM (Major League Baseball Advanced Media, aka BAM) is 10. In light of that, LWIB, the SportsBusiness Journal published a BAM retrospective penned by Eric Fisher. Formed by MLB owners as an entirely separate entity from MLB, the role of BAM was to centralize the league’s digital revenues. You know the story, the owners started BAM with a collective investment of $75-$80 million and the asset is now reportedly worth in excess of $2 billion. I have repeatedly questioned in this forum the degree to which the players share in the success of BAM. In other words, how much of BAM’s near $500 million 2010 revenues (according to Fisher) end up in MLB’s central fund? The “leaked financial docs” of last year indicated that clubs are receiving about $2 million a year from BAM. Some believe that picture was incomplete, that BAM’s contribution to the “central fund” is greater. The amount of money BAM contributes to the central fund also, at least ostensibly, also impacts on competitive balance. (Again, at least ostensibly, the motive behind centralizing revenues) MLBAM head Bob Bowman commented to Reuters last year on the owners’ BAM strategy. "As to the right dividend policy ... there's a real push and pull as to how much," he said. "You can probably remit higher dividends, but you're investing in your business and creating an asset." According to the aforementioned SBJ report, the owners appear set to continue with their approach of re-investing BAM profits. Fisher notes that one ancillary benefit to the owners of growing the value of BAM is the direct impact it has on franchise values.

MLBAM also is starting to stake a position as sort of a venture capital firm investing in smaller tech companies. Its recent alignment with Bay Area firm Auditude to develop a new platform for ad serving in live games to mobile devices includes MLBAM taking on a single-digit percentage minority equity stake.

More of these types of equity investment deals are likely for MLBAM. While it has not shown interest in an initial public offering of its own, despite a constant run of calls from investment bankers and years of rumors of IPO valuations of at least $2 billion, investing in other companies still gives the 30 MLB clubs that own MLBAM some additional financial upside.

Those team owners to have been repaid threefold on their initial investment in MLBAM, estimated at $80 million in total, and still retain 100 percent ownership of the company. That’s only a fraction of MLBAM profits over the past decade. The rest continues to be plowed back into the company to fuel more growth. Beyond that, the Nationals, Braves, Cubs, Padres and Rangers over the past half-decade each saw their sale prices boosted by MLBAM’s surging value.

Maybe I’m way off target on this one, I don’t read anybody else questioning this. Maybe BAM’s contribution to increasing franchise values filters down to the players and, combined with payments to the central fund, the PA is content with the status quo. Or, maybe the PA should ask for more from BAM.

JIM CALLIS ON THE NCAA “NO-AGENT RULE”

Probably because I’m Canadian, I’ve never followed NCAA sports. But I do somewhat follow the litigation and controversies in NCAA baseball over the so called “no-agent rule”. LWIB, Jim Callis of Baseball America wrote about the most recent suspensions of 2 pitchers. Jim contrasts the baseball suspensions with the NCAA’s actions involving Cam Newton (and his dad) and the memorabilia scandal involving football players from Ohio State:

Baseball players don't declare for the draft. They're eligible based on their standing in school or their age. As long as they're not receiving tangible benefits, players should be allowed the benefit of counsel when dealing with a professional baseball team.

AND

Major league teams, college coaches and agents acknowledge that almost every decent draft prospect relies on an adviser. That's not going to change, but the misguided and random persecution of players should. If the No Conscience Athletic Association needs something better to do, I'd suggest taking a harder look at college football.

TIDBITS

  • As previously mentioned, LWIB saw Forbes publish their annual valuations of all MLB franchises. The Forbes valuations are always followed by allegations that their numbers are…I’ll be polite…not accurate. This year, Dejan Kovacevic was quick off the mark in calling BS on Forbes for their valuation of the Pirates. (HT Joel Hammond)
  • Greg Hinz updates us on Tom Rickett’s plans to finance renovations to Wrigley Field. Greg tells us that the Cubs owner has already met with Mayor-elect Rahm Emanuel on the subject. There is also some stuff in there about how much money the Cubs could make off signage inside Wrigley and how that is tangled up in the “landmark status”. Also, Ricketts mentioned to Hinz something about closing Sheffield Avenue for a Red Sox-like street festival, although I‘m not sure if that is an idea that was already floated stiffed. (HT Ed Sherman)
  • Fox wants to use “cable cams” over the field of play and would also like umpires to wear cameras this season. Read Michael Hiestand (scroll down)
  • The Nats want new spring training digs. Their current spring training home is in Viera, on FLA’s east coast. Evidently the Nats are happy with the digs but are increasingly geographically isolated from other clubs. Read Ballpark Digest if you are interested.
  • In 08, MiLB bundled all their club web sites together to from BIRCO (Baseball Internet Rights Co.) BIRCO’s partner is MLBAM, which operates all the sites. Earlier this month, Josh Leventhal reported in Baseball America that the formation of BIRCO antagonized some MiLB owners, who would have preferred retaining autonomy over operating their club’s web sites. I’m guessing, but is that what is behind the appointment of a new chairman of BIRCO’s board? Read Ballpark Digest.


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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