Tuesday, June 21, 2011

NOMONEYBALL: To understand the complicated problem that is the Los Angeles Dodgers, imagine that you want to buy Microsoft in its entirety. You surely don't have enough money to buy Microsoft, and no bank in its right mind would loan you the money. But why should that stop you? Why not just have Microsoft take out a loan for the purchase price, then give that money to you? You are the owner, after all. And then Microsoft just has to make enough money over the term of the loan it took out to pay off the purchase price. This is how Frank and Jamie McCourt bought the Dodgers. There is nothing inherently wrong with this -- companies are bought this way (more or less) every day. It's even how Ted Turner bought the Braves. The trick is convincing a bank that Microsoft-plus-you will be profitable enough (presumably, though not necessarily, so much more profitable than Microsoft-without-you) that Microsoft can pay its debt to the bank while returning some profit to you. That was the idea behind the McCourts buying the Dodgers without using any significant amount of their own money.

The idea probably wasn't that the McCourts would cause the Dodgers to take on even more massive debt, shed assets, and use the proceeds of the debt to pay the McCourts' lavish personal expenses. And then make sure that the family's salaries and the family's kids' salaries and the family's half-dozen mortgages and personal staffs' salaries are paid, even though the team isn't paying its bank debt and might not even be able to make payroll for the players -- the ones who play baseball, which is what the Dodgers supposedly do. And then hold a big divorce party, where the only thing that the two sides can agree on is the signing of a huge television contract where a quarter of the $385 million that Fox was going to loan (not give, loan) the Dodgers up-front goes not to the Dodgers, but to the McCourts personally, because the Dodgers have better things to do with $93 million than pay banks and players -- Frank and Jamie need their $65,000 a month (each) allowance (that's a real number, by the way).

Not so fast, said MLB commissioner Bud Selig today, rejecting the TV deal under which the Dodgers were going to borrow money so that they could give almost $100 million directly to the McCourts. I think I've never said this before, but good job, Bud Selig. The McCourts have cannibalized the Dodgers in a way that, were it a normal American business, quickly would have driven the Dodgers out of business. Since it is not a normal American business -- it is part of Major League Baseball, which cannot let the Dodgers fold (and that, more than the fact that we're talking about the team of Robinson and Koufax and Fernandomania and Kirk Gibson's home run, a veritable Benetton ad of Hall-of-Fame memories, is what will keep the Dodgers alive) -- it's up to baseball to save the Dodgers from the McCourts.

Now there's going to be litigation. The McCourts go back to their tabloid divorce litigation, and they'll open up a new front against Selig and baseball, which will try to force the reconsolidation of the Dodgers' assets (like the parking lot and the ticket sales stream, which, I shit you not, have been separated from the team) and sell the package to some real businesspeople. Get some sleep, Frank and Jamie. It's going to be a long war.

21 comments:

  1. Eric J.7:39 AM

    My Father calls from the grave: "Move 'em back to Brooklyn!"

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  2. Joseph J. Finn8:34 AM

    A succint, vicious and appropriate take on this whole shameful mess.

    (Also, Bud Selig does get credit in his tenure for interleague play.  Now if he would just force the issue one way or the other with the DH...)

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  3. Meghan8:57 AM

    At first, when news of the McCourt divorce broke, I was totally amazed that the author of Angela's Ashes, whom I was pretty sure was dead, owned the Dodgers. 

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  4. Matt B9:16 AM

    If the Dodgers had to take out a loan and give the money to McCourt for him to buy the team, is it even fair to say that he "bought" the team? Seems more like the Dodgers gave themselves to McCourt as a gift.

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  5. Fred App9:30 AM

    I would be more inclined to praise Bud Selig if he had taken a similar approach with the Mets. But, apparently, "in the best interests of baseball" means that one thing for people who are friends with the commisioner and another for people who aren't.

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  6. isaac_spaceman9:36 AM

    I think it's more that he learned from the Mets situation.

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  7. (1) Awesome sum-up.  (2) Any way that we could arrange to have the McCourts buy the Yankees?

    What?

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  8. I give Selig negative credit for interleague play.  Interleague play should be limited to the World Series.  Dammit.

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  9. Nigel from Cameroon12:15 PM

    Incorrect. Money from buyer to the seller (wasn't it Fox that actually sold the team to the McCourts...digress) changed hands. The source of funds used by the buyer was provided by a syndicate of banks. This is known as a leveraged buyout and is, indeed, quite common.

    What's fascinating is the banks' complete failure in due diligence to find they were loaning money to a whack job and his wingnut wife. 

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  10. isaac_spaceman1:13 PM

    The amount of leverage is unusual (not unheard of) in baseball, unlike in the rest of the corporate world.  But you're right -- what was really unusual was the lack of due diligence by the banks who kept loaning money to a business that used huge chunks of the money for non-business purposes and, in an Enrony way, concentrated liabilities in one corporate bucket while segregating assets and revenue streams in a completely separate, and harder to reach, bucket. 

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  11. If Selig, like seemingly everyone else, hates the McCourts, he should invoke the "what's best for baseball" type clause at his disposal and just take permanent control of the team. This TV deal on its own, however much gets diverted to McCourt personally, seems to be good for the team. It gives the team $$$ now to meet payroll and other expenses, and provides significant income going forward. Selig blocked THIS deal because he didn't want to set a low bar for the value of local/regional TV rights going forward, and he should say that. Instead, he's using his (and everyone else's) hatred to cover-up the underlying economic reason for this decision.

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  12. bristlesage2:33 PM

    Oh, Jenn., a "like" button is not enough.

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  13. isaac_spaceman3:02 PM

    That's going to happen in about a week or two when the team can't meet payroll.  The triggering event for MLB to force a sale will be the default that causes MLB to make the payroll. 

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  14. MLB will have caused that failure to make payroll, though, by blocking the TV deal. It's fair to say that, at least in the short term, McCourt found a solution that would allow him to make payroll and keep the team going. Perhaps in the long-run also, but certianly in the short run, and MLB/Selig stopped that from happening. Selig is using his power in one area, to block TV deals, to benefit him in another area, booting McCourt from the situation.

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  15. isaac_spaceman5:29 PM

    I love how NL fans always hate interleague play and AL fans always love it.  I wonder why that is.  (Note:  I do not wonder why that is.)

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  16. isaac_spaceman5:29 PM

    But that's the article I linked in the post!

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  17. isaac_spaceman5:54 PM

    It may well be the case that a motivating factor, maybe the motivating factor, for Selig's action is protection of the precedent for TV rights.  But the fact is that the Dodgers are a team that, before McCourt bought them, was debt free.  Now the Dodgers are hundreds of millions of dollars in debt, their principal non-baseball assets (stadium, parking lots, ticket revenue stream) are segregated and encumbered, and the team was about to take out a loan where the value received (by the Dodgers) was only 75% of the principal of the loan. 

    The fact that Selig may have ulterior motives for rejecting the contract does not change the fact that the deal very clearly is not in the Dodgers' best interest.  The proposed deal would reduce the Dodgers' franchise value by about 20% (by taking on a loan where the money received is $291 million but the principal to be repaid is $385 million).  There is no rational business reason for that -- it's just a pure cash grab by the McCourts.  Because the Dodgers are not a free-standing public entity -- they are part of the MLB consortium and cannot act contrary to the interest of the other members of that consortium, which is exempt from the antitrust laws -- MLB has every right to say no. 

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  18. Charles Carmicheal7:54 PM

    McCourt's leveraging of the Dodgers is an extreme example, but the segregration of income sources is a stretegy for many professional teams, especially those working under a salary cap.

    This bookkeeping is why the players can not trust the numbers  bandied about concerning the markets they create.

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  19. Matt B8:04 PM

    thanks for clarifying Nigel - makes a lot more sense now!

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  20. isaac_spaceman9:15 PM

    When it's done to hide money from players in sports where there is a revenue-sharing deal, it is done in the team's best interest (not necessarily the sport's best interest, certainly not in the players' best interest, and possibly not in the interest of avoiding litigation, but justifiably in the interest of the team as an institution).  When it's done to cabin off potential liabilities, it is probably in baseball's best interest (not necessarily the fans' or the vendors' best interest).  When it is done to place team assets beyond the reach and supervision of baseball, it's only in the interest of the team owner.  If Frank McCourt ends up with a group of companies that includes a stadium company, a ticket concession company with a long-term contract, a parking concession company, and a baseball team that pays rent to the stadium, receives a small commission from the ticket company, and gets nothing from the parking company, but has north of $100MM in annual operating costs, then the huge question is which of those assets MLB can sell.  If MLB can only force the sale of the team but the new owner doesn't get the stadium, parking, or ticket concession (though the latter might be so debt-ridden that it doesn't matter), that would be a very bad thing for a bunch of people and a very good thing for Frank and Jamie McCourt.   

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  21. Duvall12:31 AM

    NL fans prefer watching baseball.

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