Monday, April 20, 2009

Late to the Party

As I wrap up my civic duty and plan for a two day business trip out of town, Crain's finally realizes that Tom Ricketts and his family have no chance of getting $450 million in bank debt to buy the Cubs:

Tom Ricketts is offering private investors a stake in the Chicago Cubs as he works to finance a $900-million acquisition of the team by his family.

Crain's has learned that Mr. Ricketts - scion of the TD Ameritrade Inc. fortune - is trying to raise $100 million or more through the sale of preferred stock to wealthy individuals. Money raised from investors would reduce the amount the Ricketts family would have to borrow from banks to finance the Cubs deal.

The preferred shares would represent an ownership interest in the team but confer no voting privileges or other rights of control. Investors would be entitled to a 6.5% dividend on their shares, according to people familiar with the terms.

They also would get front-row seats at Wrigley Field, opportunities to hobnob with players and a place on an "advisory board" that would meet regularly to discuss the team's future. After 15 years, they'd get their original investment back without sharing in any appreciation in the value of the franchise over that period.

People close to the Ricketts group say Mr. Ricketts hopes to find five to 10 investors willing to put up $25 million apiece.

So, the Ricketts family was going to put up $450 million of their own money. They are now looking for another $250 million in private equity to back the purchase. If they get this, there is a huge positive for Cub fans. A lower amount of bank debt means less debt service which means less cash flow needs to be diverted from operations.

This frees up lots of money for free agents, new front office personnel, capital improvements to Wrigley Field, etc. All good things.

But what really are the chances of finding a large number of people to have $25 million to become silent partners in exchange for a good return compared to current debt markets, but lousy compared to historical equity returns? Pretty weak, you have to think.

This is EXACTLY what Mark Cuban said when he bowed out of the bidding (emphasis mine):

With the credit market on the fritz, the other option was to add investors and just pay cash. However, if we were going to pay cash, I was not going to bid anywhere near 1 Billion dollars for the assets. Once the credit crisis hit, the value of cash went through the roof. It was not just a matter of how much the Cubs were worth, it was also a matter of how much more money I could earn with that cash. Cash was and is king. Distressed investment opportunities were rolling in the door that could make me multiples of what any sports team could. I could not see any scenario where the Cubs were worth anywhere near the numbers that had been discussed in the media. There is one publicly owned team, the Atlanta Braves, that are owned by Liberty Capital. The market cap of ALL of Liberty Capital net of cash and debt got as low as $250mm dollars, and today trades for about $500mm dollars, and they own far more than just the Braves.

So there was the issue of valuation. There was also the issue of the economy. It was impossible to predict the full impact of these tough times on any sports team. That uncertainty created two issues. The first of course was valuation. How much would I be willing to pay for the team ? I wasn’t sure. More important to me was the cash flow. If the economy had a significant impact on future revenues, it would also impact how much I could invest in players. The absolute last position i wanted to be in was paying so much for the team, that if revenues fell off, I couldnt play to win.

So when it came down to it, I did what I thought was the only smart thing to do. I asked for an extension. I knew that if they got the money they wanted for the team, well my bid was not going to be high enough anyway. If they didnt, or the other bidders couldnt come up with their money, they would come back to me.

I’m still waiting

You may not have to wait much longer, Mark.

There's no way that the Ricketts close this deal giving the Tribune $900 million at close. They may still get the team, but not at the agreed price in a lump sum.

Hopefully, post biz trip, Ivy Chat will return to discussing developments, not simply awaiting them.

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