Seems like everybody’s got a price,
I wonder how they sleep at night.
When the sale comes first,
And the truth comes second,
Just stop for a minute and smile
It’s not about the money, money, money
We don’t need your money, money, money
We just wanna make the world dance,
Forget about the price tag
– Jessie J, “Price Tag”
(The following is not something I’d normally write about, but it hits the intersection of three people of importance to me: my long-time friend Jon Weisman, who writes the excellent blog Dodger Thoughts; another friend, Rocky Agrawal, also a blogger, who has repeatedly decried the lack of financial analysis done by journalists these days; and my late father Edward Rogowsky, who loved the Brooklyn Dodgers, even when they left him for Los Angeles.)
The Los Angeles Dodgers were sold yesterday for $2 billion, obliterating the previous record price for a sports franchise set when the Miami Dolphins changed hands for $1.1 billion. Embattled owner Frank McCourt — hated more in Los Angeles than Walter O’Malley is for moving the Dodgers out of Brooklyn — will clear enough on the sale he could nearly pay cash for the Dolphins. Has Magic Johnson’s trademark grin so seduced Mark Walter of Guggenheim Partners (the money man), Stan Kasten (the baseball man) and Peter Guber (the movie mogul, Warrior co-owner and minority partner) that they’ve all lost their minds?
If you read the Los Angeles Times, you’d think so. “Having already paid a record price, the cost of assembling and maintaining a winner on the field could be challenge enough, experts said. ’I don’t want to predict that they are not going to be able to make the necessary player moves,” said Andrew Zimbalist, an economics professor at Smith College. “I’m just saying it’s a question mark.”
Let’s just give this guy the benefit of the doubt. Bill Shaikin called him early, he hadn’t had time to analyze the deal maybe, perhaps he actually knows very little about baseball economics despite writing a book called Baseball and Billions. I have no idea. Here’s what I know: Baseball has a set of well understood costs. The recent labor-agreement extension puts in place changes to the luxury tax that will effectively add a hard salary cap to baseball to the sport. How do we know this? The Yankees have stated their intention to get their payroll at or below the $189 threshold by 2014.
There’s been a ton of hand-waving around the McCourt situation and commissioner Bug Selig’s high-minded protestations about how McCourt used the team as his personal piggybank, saddling it with debt. When McCourt tried to keep the Dodgers out of bankruptcy by negotiating a new long-term, local-television contract, Selig claimed that money should be used to improve the team, not pay off debts or some argument along those lines. But what exactly is a team supposed to do when their is no generally reasonable way to improve the team anymore? If, for example, the Yankees actually spent their YES Network revenues on “improving the team” instead of enriching the Steinbrenner family — using the team as their personal piggy bank if you will — their payroll would likely need to approach $300-350 million. Would anyone really prefer that to the status quo outside of a few small-minded Yankee fans who actually like the mercenary version of the team better than one based on more homegrown talent? (Keep in mind, the teams that won the World Series did so with Mariano Rivera, Derek Jeter, Bernie Williams, Andy Pettite, Jorge Posada — all home-grown prospects. Yes, those teams has a few high-priced free-agent buys, but the core was home-grown.)
How do I know this? Well, let’s consider a nice, high-payroll team Dodger fans know a little bit about, the Los Angeles Angels. Thanks to Deadspin, we know that the 2009 Angels made $46M in local broadcast revenue in 2009. The Angels finished 8th in payroll that season at $122 million. The Angels signed a new TV deal in December of last year that will pay them $3 billion over 20 years, or $150 million per season, roughly $100 million more than they were making. Oh, by the way, in 2009, the Angels turned a $10 million profit with that payroll and that “paltry” TV deal. Now, there is no doubt the Angels’ new deal is graduated over time since it’s a 20-year deal. In other words, it’s not an immediate increase of $100 million per year. Regardless, it’s guaranteed money. They can budget based on it, they can borrow based on it, they can sign players like Albert Pujols to insane contracts based on it.
Oh, and those Angels, as much as they’ve been embraced by Southern California are not as beloved as the Dodgers, nor as they as valuable a television property as the Dodgers. The new Dodger ownership group is thinking more like the Lakers deal, which is worth up to $200 million a year over 25 years. And keep in mind, the Lakers only have about 70 games broadcast locally each year versus north of 150 for the Dodgers. It’s quite possible the Dodgers television income is headed for $250 million a year, on average, guaranteed, for the next 25 years!
Since we know a little bit about the Angels expenses and some special things about the Dodgers expenses, we can actually look ahead to whether the Dodgers can field competitive teams in the coming years.
(A note of clarification: There is actually a terrible lack of correlation between spending and winning. People are confused because the Yankees spend so much and participate in the postseason so often, it seems that spending guarantees winning. It doesn’t. But, in fairness, tiny payrolls make it harder to win. If the new owners were going to be payroll limited like, say, the Oakland A’s are, fans would be right to be concerned. Fortunately, the new Dodgers will face no such constraints as we’ll see.)
Let’s just assume some generally accepted facts in evidence: the Dodgers will have to spend $200-300 million on stadium renovations and this Guggenheim Partners will need to receive some kind of return on its investment. On some level, it doesn’t actually matter if the investment is all equity, debt and equity, or all debt. Bud Selig kept pretending it mattered when he wanted to rid the sport of the scourge of McCourt or when MLB wanted to disqualify a particular bidder but the truth is, it really doesn’t and here’s why:
Guggengheim is a financial services firm with $125 billion in assets under management. Some of those assets are risky, like stocks, and some are riskless, like treasury bonds held to maturity. It’s ownership of the Dodgers will be handled in some combination of the following, no matter what Selig wants:
- Either it will saddle the team with debt to limit the risk to Guggenheim itself and the team will pay down the debt with its various sources of revenues: ticket sales, national and local TV revenues, merchandise, etc. — whatever is leftover after paying the players and the other costs of operating a team. (If they had bought the team with debt, you could worry about the purchase price. They didn’t so if they decide to move debt onto the balance sheet, it’s an accounting choice not some sort of cataclysm. This is hard for laypeople to understand as undercapitalized owners like those in Texas and Los Angeles eventually pushed their teams into bankruptcy because they couldn’t find financing. The new Dodgers owners are not undercapitalized. Any debt they push onto the Dodger balance sheet will be about minimizing taxes and revenue sharing payments, not about desperately scrambling to retain control of the team.)
- Or it will keep the team’s balance sheet debt free and turn a gigantic annual profit, which it will pay out to the owners of the team annually, in a pro rata share based on ownership. Its share of those profits will be recorded on some internal accounting system at Guggenheim as a return on the Dodger investment
What’s not happening is this: the Dodgers are not taking their $100 million revenue increase and spending $200 million on payroll. Again, the Yankees are going to set a market-top at $189 over the next several years. Let’s go back to those 2009 Angels. They spent $120 million and made a $10 million profit with a revenue sharing bill of $16M, local television revenue of $46 million and minimal interest expense.
Fast forward to the 2014 Dodgers, operating under their new deal, in the third year of their new ownership, having begun (or perhaps completed?) their $300 million in stadium renovations. Assume the TV deal runs 20 years and pays out $200 million per season — which is absolutely the low end figure for any such deal. The 2009 Angels took in $100 million in ticket revenues but made the playoffs and pulled in an extra $16 million from doing so. Even though it’s all-but certain the Dodgers can outdraw the Angels, playoff appearances are no guarantee, so we will assume the rest of revenues are similar.
Baseball rules on revenue sharing are a bit byzantine, and it will behoove the Dodgers to delay paying into the pool now in the hope that the rules change in their favor later. Why? Three reasons. (1) A dollar today is worth more than one tomorrow. (2) The rules on revenue sharing changed with the 2011 collective bargaining agreement, cutting the number of eligible teams and they might change again, perhaps limiting the amount any one team has to contribute. (3) The new television deal will pay the Dodgers more in the latter years. While that will increase revenue-sharing commitments under existing rules, again, we don’t know the future rules and furthermore the new owners will likely want to maximize short-term financial flexibility.
Let’s just assume they borrow $300 million to improve the stadium at 10 years and 8%. The lender might well be Guggenheim, the Dodgers don’t have the best credit rating, but honestly, I’m taking a guess at the interest rate. Anyway, that’d look like $44 million in debt service. Keep in mind, versus those Angels, the Dodgers have at least an extra $100 million to work with. (Here, I’m assuming the deal is graduated such that it starts at only $150 million and grows over the 20-years to $250 million for an average of $200 million. And, again, this estimate is low, almost certainly too low.) If we assume they can take the stadium costs off the top — which seems to be kosher under MLB rules — their revenue-sharing bill should be around $35-40 million, up to $24 million worse than the Angels of ’09. If they wanted to field a $135 million team, they’d be $13 million worse than those Angels. In case your calculator isn’t handy, mine tells me +100 on revenue, -37 on fielding one of the most expensive teams in the league in a beautifully updated Dodger Stadium. Sounds like a profit of $77 million, given that the ’09 Angels made $10 million. (All these numbers seem to pass the sniff test based on Forbes 2011 report, which doesn’t have published financials but can be seen here.)
It’s here that it’s worth noting, cynically, that if the Angels reported a $10 million profit that year, they almost certainly made much more. Professional sports accounting is a lot like Hollywood accounting (or really any corporate accounting). The more you show in profit the worse it looks and the more you pay in taxes, depending on which financials we’re looking at. As time goes by, the television revenues will grow, the stadium expenses will go away, the revenue sharing figure might rise (albeit more slowly) and the team will become that much more profitable. Given the development potential of the existing land, which the new partnership owns half of, even if the Dodgers do end up moving or building a new stadium, it appears they can afford to finance that while still fielding an upper-echelon payroll team. Keep in mind any new stadium is way down the road, would be financed over 20-30 years, and is not really something fans need to worry about anyway. Fans also don’t need to worry that in 20 years cable/satellite television won’t have 90% penetration and won’t be able to afford deals like this in 2030 (I bet they will, but we’ll cross that bridge in 2030). The likelihood of whoever the Dodgers contract with being bankrupt in 20 years is nearly nil and so the deal is very close to money in the bank the day it’s signed. It will also be one of a dozen similar deals signed across the country that, while prodigious in sports terms, represent a relative small portion of the cash flows of companies like Comcast, Time Warner, et al. which generate tens of billions annually.
That said, the new television contract might end up contributing closer to $300 million annually over its lifetime and even with revenue-sharing requirements on that, might infuse something close to an additional $100 million into the team per season. Since the $200 million TV deal already allows a top-five payroll, fans might not like hearing this, but should that happen, the money is going to Guggenheim, Magic, Guber and whoever else owns a small piece of the team. It’s not going into a Yankee-like payroll or gold-plated seats. And it’s not going to matter either way because despite all the worrying, the Dodgers are going to be rich and just fine. Yes, this was the most breathtaking price ever paid for a sports franchise by far. As many other commentators have explained, it’s because local-televised sports are insanely valuable right now in the era of DVRs and ever-escalating sports rights fees. Guggenheim manages $125 billion not because they’re fools but because they’re good stewards of other people’s money. The $2 billion is about as safe and sound as it can be. Be thankful they didn’t offer everyone free Dodger Dogs. If they do, then you need to worry.