Thursday, December 13, 2012
Confusion over Dodgers' endless money
By Darren Rovell
Another week, another huge contract taken on by the new Los Angeles Dodgers’ ownership group.
While Dodgers fans might be cheering the team's now $215 million payroll -- having added Korean pitcher Hyun-Jin Ryu and Zack Greinke -- as a sign of immediate investment in and commitment to a winning team, others, including many baseball insiders, are wondering what type of operation these guys are running.
If the Dodgers are spending $215 million, which balloons to $235 million with benefits and a luxury tax, how are they doing this when, before all other costs, the team will likely gross an estimated $250 million in 2013?
It hasn't been easy to figure out because, frankly, the principals at Guggenheim Partners (which owns the team), along with president Stan Kasten and chief marketing officer Lon Rosen, haven't been forthcoming with their strategy. While the Dodgers have every right to be tight-lipped, it certainly hasn't made it easy for the league, the other owners or the fans, who want to be assured that the team isn't loading up debt that would affect the franchise's future.
So far the answer to rationalizing the $2.15 billion purchase price and recent spending is an upcoming television deal. But the silence since Fox's exclusive 45-day negotiating window passed on Nov. 30 has to be concerning. In September, Kasten told me that, thanks to the fruits of the television deal, "We’re confident we’re going to get the return that we all foresaw when we bought the team.” But he also said he expected the deal would be done in December, and with the holidays coming quickly, one has to wonder if that deadline will be hit. Haven't Fox and the Dodgers had a whole season to figure out their numbers? What happened to the 25-year, $6-billion deal that had been reportedly close to being signed? Although it would qualify as the second-largest deal in baseball TV in baseball history (after the Yankees' deal), sources say it didn't work because of how the deal was arranged. Representatives of the Dodgers ownership group and Fox declined to comment.
Zack Greinke is one of the latest high-paid players to sign with the Dodgers.
It's no secret that the value of owning the team, as it relates to the TV deal, lies in the details that emerged from the bankruptcy court. In the deal, Major League Baseball assigned a fair value of $84 million, increasing at four percent per year, to the Dodgers’ TV rights. The Dodgers’ new owners, at least initially, were under the impression that anything they negotiated above that would be theirs to keep because the $84 million portion would be subject to the standard 34 percent revenue-sharing distribution. But that’s not the case. That would only occur if the Dodgers had a legitimate equity stake in a network where income associated with the team’s rights would ebb and flow instead of earned guaranteed money. But if the Dodgers were to get an $84 million rights fee and then -- even with an equity stake in the network -- a guaranteed distribution of cash from the network partner, that's not a risk, and that money would be subject to revenue sharing.
Rob Manfred, executive vice president of economics and league affairs for Major League Baseball, would only say that "the club's television rights in their first negotiation is between the club and the broadcasting partner, so when it comes time to review the deal, we will obviously do that."
Major League Baseball is well acquainted with such hocus pocus. The league recently ruled that more of the Texas Rangers’ TV take was subject to revenue sharing. Although the Rangers had an equity stake in Fox Sports Southwest, they received additional guaranteed money besides the rights fee. MLB informed the Rangers that the guaranteed money would be added to their rights fee for the purpose of revenue sharing.
Then there's the Dodgers’ ownership transfer, which MLB expects sooner rather than later.
At some point the Dodgers’ owners have to shift some of the team’s corporate ownership, manifested in the investment made by the insurance side of Guggenheim's business, to individual ownership. The goal would be to make sure the team's decisions can't be affected by outside parties. It's not known how much the insurance companies own, because ownership has chosen not to talk about it, but it's believed to be a very sizable portion of the Dodgers.
Assuming the Dodgers would want to make this move soon, how would they have enough money to do that when so much of their revenue stream is going into player payroll in 2013? How attractive could the new network be to bankers to make them confident in lending money to shift the ownership structure and back the team in any equity stake it has in a network? And that's not including the renovations they promised for Dodgers Stadium. (Magic Johnson mentioned that they've committed to $100 million this week.) But how will they do this when they are already pushing the limits of MLB's debt-to-equity ratio rule? Perhaps there is more cash among the ownership group than we are led to believe, considering that none of them is close to topping Forbes' billionaire list.
Maybe the new owners really know what they're doing, and those who haven't been let in on their plan (read: everyone) can't see their genius. But there are certainly a lot of nervous people in the industry wondering where this is all leading. They wonder if it's possible they somehow miscalculated what the Dodgers would net from a TV deal and wondering if this is similar to the overly leveraged Frank McCourt that led to the mess that the new owners inherited.
All we know is that the new Dodgers ownership doesn't seem a bit bothered by the perception of uncertainty. With a $235 million investment in 2013, Dodgers general manager Ned Colletti told reporters at Tuesday's Greinke signing, "We're pretty much where we're going to be budgetarily … unless something jumps out at us that's too good to say no to.”