Friday, April 22, 2011

History Repeating

The Dodgers are a mess. So big of a mess that Bud Selig had to have Major League Baseball take over the team's operations. This means that the Dodgers are now in a position similar to what the Montral Expos were in. How did they get here? Debt, divorce and really stupid management:

McCourt fired his wife, Jamie, from her position as the team's chief executive officer. She filed for divorce days later and McCourt responded by saying she had an affair with her bodyguard/driver and hadn't been doing her job.

That set up an ugly fight over money and control of the Dodgers that went on for months.

Bob Daly, the team's managing partner from 2000 to 2004, said baseball executives knew McCourt borrowed heavily to buy the team but they assumed he would pay down that debt once he took over. The divorce proceedings revealed that he and his wife paid themselves huge salaries and bought a handful of Southern California properties.

McCourt gave himself a $5 million salary and his ex-wife $2 million, according to evidence at their divorce hearing.

Among their many incidental expenses was a six-figure fee they paid Vladimir Shpunt, a self-described scientist and healer in Boston, to send positive energy across the country to the team. Each of the McCourts has since said it was the other one's idea.

All the drama has left some fans wondering whether the Dodgers are a second-tier team in a run-down stadium that has become increasingly dangerous — so dangerous that the Los Angeles police are now plentiful at the stadium to provide security since the beating of the Giants fan.
Too much debt, a .500 team, a run-down stadium.

Just terrible that this could happen.

Never again?

Friday, April 15, 2011

Cutting Spending

The Cubs need to maximize attendance, and also the value of the brand, is more than just a simple profit proposition. In acquiring the Cubs, the Ricketts took on a massive amount of debt, in the order of $674 million. Our good friend and former 1060 West blogger Gaius Marius provided a link to this summary of the Cubs debt picture. In short, the debt includes:

$250 million in private placement notes due in staggered maturities through January 2022
$175 million in bank debt due October 2013
$249 million in subordinated debt, of which at least $175 million is owned by the Ricketts

The first two pieces have all the Cubs assets, including Wrigley Field, pledged as collateral for the loan.

While it’s impossible to know exactly what the annual costs are for these loans, we can make a reasonable guess. Interest rates are probably somewhere near 5% for the bank debt, 65 to 7% for the private placement debt, and even higher for the subordinated debt.

Since the Ricketts own the bulk of the sub debt, the payments related to this are really irrelevant. If the Chicago National League Ball Club, Inc. has to cut a check every year to the Ricketts Family Trust, the Ricketts can turn that money right around and put it back into the Cubs.

The private placement notes are trickier. The amortization schedules over the 13 year time period could be very irregular. But, we do know they need to be paid in full by the end of 13 years. We can also guess that none of them mature for at least 5 years. If you figure that the notes are interest only for the first 5 years, then begin to paydown evenly over the next 9 years, we can estimate the private placement debt service like this:

Year Interest Principal Total
2010 $15,000,000.00 $- $15,000,000.00
2011 $15,000,000.00 $- $15,000,000.00
2012 $15,000,000.00 $- $15,000,000.00
2013 $15,000,000.00 $- $15,000,000.00
2014 $15,000,000.00 $27,777,777.78 $42,777,777.78
2015 $13,333,333.33 $27,777,777.78 $41,111,111.11
2016 $11,666,666.67 $27,777,777.78 $39,444,444.44
2017 $10,000,000.00 $27,777,777.78 $37,777,777.78
2018 $8,333,333.33 $27,777,777.78 $36,111,111.11
2019 $6,666,666.67 $27,777,777.78 $34,444,444.44
2020 $5,000,000.00 $27,777,777.78 $32,777,777.78
2021 $3,333,333.33 $27,777,777.78 $31,111,111.11
2022 $1,666,666.67 $27,777,777.78 $29,444,444.44

The line of credit that is due in 2013 is probably interest only which adds another $8,750,000 in annual debt service. It is possible that there are currently some principal reductions required, but not likely given that the banks were already paid down via the private placement notes. All in, it appears the Cubs annual debt service is close to $24 million per year with a major refinance need in 2013. Furthermore, when that debt is refinanced, it will likely be required to start to amortize beginning in 2014. That could escalate the debt service required beginning in 2014 to over $60 million per year, up from $24 million now.

To sum up, while the Cubs can certainly afford the cost of their debt today, the cash flow requirement is going to escalate dramatically beyond 2013. The key risk to the Ricketts is the bank debt that will need to be refinanced. The terms of that refinancing will be dictated by the cash flows available for debt service. The more cash available after paying for operations, the less risk to a lender. The less risk, the better the terms.

So, how do the Cubs improve cash flows if the seats are empty? There are a few ways. The easiest one is also the most obvious. Cut payroll.

Per Cot's Contracts, the Cubs 2011 payroll is $134,004,000. That drops radically over the next two seasons, which happen to be just before the debt needs to be refinanced. Let's see what goes away::

Aramis Ramirez - $14,800,000
Kosuke Fukudome - $14,500,000
Carlos Pena - $10,000,000
John Grabow - $4,800,000
Jeff Samarzdija - $3,300,000
Kerry Wood - $1,500,000
Reed Johnson - $900,000
Carlos Silva - $9,250,000
Total: $59,050,000

Carlos Zambrano - $19,000,000
Ryan Dempster - $14,000,000
Marlon Byrd - $6,500,000
Sean Marshall - $3,100,000
Total: $42,600,000

Grand Total: $101,650,000

That’s a lot of free cash flow. Now, clearly the Cubs won’t just replace those 12 guys with guys salaried at the major league minimum (total cost of about $6 million). Some will go to raises for other players (like Geovany Soto and Carlos Marmol). Some of that money will go to replacements, a few of which might get good sized dollars. As you can see, an Albert Pujols level contract is certainly affordable if payroll is kept flat.

But if evil bankers tell the Ricketts that they need to see more earnings before interest and taxes, payroll could easily be cut. If payroll goes down, minor league development is paramount to keep the team competitive on the field. Unfortunately, Jim Hendry's track record in player development is spotty at best.

Now, payroll is only the easiest way to free up cash flow. Another is to raise revenue. The solution here could raise more bitching than discussion of raising taxes does.

Friday, April 08, 2011

Small Attendance, Big Change

The Cubs season is off to a ho hum start. While .500 is about where many expect the Cubs to finish, there was certainly hope for a faster start given the Pirates and Diamondbacks as opponents. There has been some gnashing over the temporary loss of Andrew Cashner and Randy Wells, but that's really been a side story. With expectations already low for the team's win total, tertiary matters have been elevated to high profile status. What we're talking about here is the massive drop in the Cubs attendance.

Last year, the Cubs first 6 home games were against Milwaukee and Houston. Tickets sold for the 6 games totaled 236,165 or an average of 39,361 per game. That compares to this year versus Pittsburgh and Arizona of 193,600 or an average of 32,267 per game. Furthermore, last year saw the smallest crowd of over 37,000 and 2 crowds of over 40,000. This year has already seen 2 crowds UNDER 30,000 and only 1 crowd larger than any of last years.

It's also very important to note that these numbers represent tickets sold. Total people at the games have been far fewer. It’s been guestimated that the last three days, total in-the-house attendance was certainly under 15,000 and possibly below 10,000. God help newbie Keith Moreland in the Guess The Attendance Game.

Big deal, you say. This only matters to the Ricketts net worth! It has no bearing on the game on the field.

Hardly. The attendance drop, if sustained, could have huge ramifications on multiple aspects of the Cubs operations. This includes the current players, future players, the front office, and even the future of Wrigley Field itself. Why? Because the Ricketts are in this only because they convinced their father this this was a good business investment.

According to Papa Joe Ricketts himself, the way Tom convinced Dad to get into a business which dad knew nothing about was the point that the Cubs, “sell every ticket, every game, win or lose." Furthermore, Tom told Dad, "(Tom) does tell me that, 'We got the ingredients, Dad. We got the management and we got the players, so we've got the ingredients to win a World Series.'"

Well, the team has spent a grand total of 24 hours with a winning record since the Ricketts purchased the team. Tickets are not sold. $12 million is being sent to Carlos Silva to do nothing but sit on his duff. And Wrigley Field sill needs $250 million in renovations with the probability of getting tax money to pay for it somewhere between slim and none.

With all of this happening, it's not a stretch to think Dad will insist on a change in the status quo. The Cubs have cash flow needs. These are not the days of the Tribune where a massively profitable parent company was looking for cheap programming for two of its media outlets and some additional profits to send upstream. The Ricketts have debt to pay. Massive amounts of debt.

According to Forbes (, the Cubs have the highest debt-to-enterprise ratio of any team in baseball at 75%. This debt isn't that much of a problem so long as the team generates enough sales and ancillary revenues to service the debt. But, if cash flow becomes tight, the Ricketts will have to rely on personal net worth to pay back debt. That's easy, you think. They're billionaires. So were the Wilpons and McCourts.

The drop in attendance is only the latest sign that the Cubs brand is suffering through some serious attrition. We also know that the Cubs Convention didn't sell out and that TV ratings were off 39% last year. A deteriorating brand leads to deteriorating revenues which leads to the cash flow problems described above.

Which leads to the need for additional equity in the form of cash.

The Ricketts will certainly look to shield their personal balance sheets from the Cubs' corporate financials. Over the next few posts, we'll try to see how they might do this.

Friday, April 01, 2011

The Beginning of the End?

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