Thursday, August 27, 2009

Inside The Deal Numbers

Fascinating stuff in the Trib today on the structure of the sale. Ameet Sachdev has done an excellent job reporting this story. He notes today several key points, not the least of which is a $35 million reserve fund:

The $35 million, the document said, represents reserves that the family will provide to support the Cubs once it takes control of the team, which is expected in the fourth quarter. The reserves are similar to a rainy day fund.

The cushion should not alarm Cubs fans about the team's financial strength, but it speaks volumes about the highly complex financial deal engineered by Tribune Co. to sell one of Major League Baseball's storied franchises.

Please. Don't be frightened. ALL IS WELL!

Deal valuation:

Court documents also shed more light on how the family is financing a deal that values the Cubs, Wrigley Field and related broadcast assets at $845 million. That's 3.5 times the team's 2008 revenue of $241 million, court papers said, making it one of the richest deals in recent baseball history.

Cash use:

The family will contribute $150 million of equity to the partnership and lend it another $248.8 million. The family also is borrowing $425 million from five banks, including JPMorgan Chase and Bank of America, that will be placed in the partnership.

In exchange for the $823.8 million, which does not include the reserve cash, the Rickettses will receive 95 percent of the partnership. Tribune Co. will own 5 percent of the entity and receive $740 million after taxes and other adjustments.

Oh ho! $425 million in bank debt? That’s up from the $350 million that was always reported previously. Looks like the $100 million private placement didn’t go so well. Maybe that’s why we stopped hearing about it. And there’s a big part of the reason the price fell from $900 million to $800 million $843 million.

The Ricketts’ portion is $398.8 million. That fits with the $403 million in TD Ameritrade stock they sold back in the spring. It’s just now structured part as equity, part as debt. That debt piece is surely to help Sam Zell avoid taxes.

Baseball's debt-service rule limits a team's debt to 10 times its cash flow, defined by the acronym EBITDA (earnings before interest, taxes, depreciation and amortization).

The Cubs' annual cash flow, sources said, is about $30 million, not including the profit distribution from a 25 percent stake in Comcast SportsNet Chicago.

It would seem the team's debt, including bank and family loans, would total $673.8 million, an apparent violation of league rules. But sources said that MLB tends not to count debt contributed by an owner because the owner will have to pay the banks first.

If MLB is only counting the $425 million as debt in the Cubs transaction, then the Ricketts will comply with league rules, but just barely, at the team's current $140 million payroll.

Counting the Ricketts' $248.8 million as not truly debt is standard. Subordinated debt as this appears to be is often considered equity by lenders. No reason that MLB wouldn't do the same to get this deal closed.

The annual interest payments on the bank debt are expected to be about $27 million, sources said.

$27 million on $425 million in debt equates to an interest rate of 6.35%. For reference, the prime rate right now is 3.25%. On $425 million in debt, each 0.25% increase in interest rate equates to a $1 million increase in debt service costs. Net cash flow after payroll was $30 million before Comcast profits. Does this means a 0.75% increase in interest rates, which is expected to occur by this time next year, would leave the Cubs with negative cash flow? Well, at least at the current payroll?

Hard to believe payroll will increase without additional equity injections from the Ricketts.

Considering the slim margin, the $35 million reserve fund made the partnership structure more palatable to baseball, said one high-ranking league official.

"We thought it was a safe number for protection purposes if anything ever went south," the source said.

Yeah. A one year interest cushion is pretty good. Especially if it’s held on deposit with the lender banks.

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