Thursday, September 27, 2012

Tremors.

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Two Dodgers-related news stories this week caught my attention. You've probably seen both. We'll go chronologically, and I'll explain why the second changes my opinion of the first.

Jamie McCourt popped back up, and she's claiming Frank McCourt misrepresented the value of the Dodgers in connection with the couple's divorce, and that her $131 million payday is essentially unfair in light of the club's sale for $2.15 billion.

I don't like her argument here, as presented. Yes, at one point in the litigation, Frank claimed the enterprise to have a net worth of less than $300 million. This was during the time when it was beneficial for Frank to show a "low" net worth, because, among other things, the less liquid he showed himself to be, the lower he could argue his payments to Jamie should be.

The problem, as I saw it, was that Jamie herself had offered an estimate to the enterprise's net equity value value: in excess of $2 billion. How do you make a claim that you didn't know how much money was there when, two and a half years earlier, you had the number pretty accurately pegged?

Further, there's more to the settlement story than Jamie's filing seems to have told. At the time she agreed to the $131 million figure, there was a very real chance Frank's incredible run of luck would end, and he would crap out. Jamie would be stuck in bankruptcy court for years. Settlement was, as it very often is, a risk-mitigation maneuver. She decided $131 million in hand was reasonable.

Frank's lawyers didn't comment on the story, but I suspect they might have said this was the second time Jamie hedged against Frank's possible failure and was wrong.

But now, there's this TV rights/Major League Baseball issue, as reported on today by Bloomberg (and by Bill Shaikin in May). Apparently, a special agreement between baseball and the Dodgers allows the Dodgers to cap the amount of television rights money received in a new contract that is subject to revenue sharing to about $84 million annually. In a nutshell, this means that, if the club's new TV deal paid $225 million annually, the Dodgers would contribute 34% of $84 million, rather than of $225 million.

A major league baseball executive downplayed the story, confirming that the Dodgers will pay 34% of the money "actually received" in a deal. So, which is it? Are the Dodgers getting a huge tax break from baseball? Or is this all a big misunderstanding?

The key is the phrase "actually received." I am not aware of any requirement that the entity selling the TV rights (and taking in the cash) needs to be the legal entity that owns the Los Angeles Dodgers. Want to be clear: I am purely speculating at this point. But I know of nothing that would stop an affiliated entity (but not the Dodgers) from raking in the TV money, while paying the club itself just enough to cover the annual revenue sharing bill. The rest might stay in the TV entity or be paid up to another. But the Dodgers would not "actually receive" it.

The fans would be justified in seeing this as a major red flag; after all, how did splitting off ticket revenue work for the club? However, I'd advise a wait-and-see approach. The new ownership group seems awfully committed.

But I'd like to turn back to Jamie. Surely, she was permitted to conduct (and elected to conduct) some sort of due diligence investigation of Frank's assets prior to agreeing to the settlement. What struck me after digesting the TV rights news was the question:

Did she know of the special MLB/Dodgers deal?

I ask, because if she didn't know of the deal, she didn't know what could have been a pretty important factor in the club's value to potential bidders.

Could she have known? Should she have known?

Obviously, conclusions are premature. Whether Jamie failed to do her homework or whether Frank didn't give her information she should have had are complex questions that will likely take a while to sort out.

Just know that these two stories aren't as separate as you may first think.
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Tuesday, October 25, 2011

The two plans.

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I just filed to ESPNLA about this week's back-and-forth in the Dodgers' bankrtuptcy case. I'll update this post with a link when one is available (UPDATE: here's the link), and I'll tweet it out as well. Meanwhile, here's a chart offered by MLB to summarize the differences between its plan (selling the Dodgers) and Frank's (selling the TV rights). Some zooming may be necessary.

MLB Chart

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Thursday, October 13, 2011

Could Frank McCourt lose everything?

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Short answer: yes. Bill Shaikin and the Times put together an excellent article today detailing the potential for Frank McCourt to end up losing money on his (and Jamie's?) purchase of the Dodgers. Let's cut to the chase:
McCourt's intention in putting the Dodgers into bankruptcy is to keep the team, not to sell it. However, the debt load and tax liability have increased to the point where the $150-million loan assumed in bankruptcy funding could wipe out much — if not all — of whatever profit he would make if he is ordered to sell the team.
[...]
In case of a sale, McCourt would have to pay off taxes as well as debts. In July, McCourt told the divorce court that "a sale would result in … the incurrence of between $80 million and $200 million in tax liabilities."
That tax bill could rise with penalties. In a divorce court filing in August, Frank McCourt's accountant noted that the 2006, 2007 and 2008 tax returns for Frank and Jamie McCourt "as well as certain entities that allocate income to them" are currently being audited "by federal and state taxing authorities," with any liability yet to be determined.
So what's behind that ticking tax time bomb? Basically, Frank McCourt has held substantial loss carryforwards dating back to those halcyon parking lot days, and that bill--which I have been assured is over $100 million--would come due upon sale of the Dodgers. Add that to the team's debt load, and all the sudden Frank must sell the club for damn near a billion dollars to make a profit.


And, of course, there's the very real chance that whatever equity remaining in the Dodgers will have to be split with Jamie. Granted, just about every single person who reads this site would kill to even be only "very wealthy," so Frank's potential descent from "obscenely wealthy" won't be the cause of much sympathy.


But what happens if Frank can't satisfy the debt and tax obligations following a potential sale? Both Frank's most admirable and most troublesome trait is his perseverance, or perhaps stubbornness. He's made a pretty fabulous life operating on a "damn the torpedoes" basis, but this might be the most accurately aimed one yet. The last few years have seen the fall of numerous personal financial empires. Is the owner of one of the most storied franchises in American sports next?


As is often the case, it's probably wise to temper expectations of such an extreme outcome. After all, baseball desperately wants Frank out of the game. You have to figure that, should Frank become convinced he can't win the right to sell off the club's TV rights, he'd finally go to baseball and try to cut a deal.


That'd be the prudent thing to do. Right?
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Thursday, October 6, 2011

Running out of lifelines.

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You can't turn around without finding another reason to believe the McCourt era may soon come to an end in Los Angeles. It's long been assumed that Frank McCourt's only way to emerge as Dodgers owner when the team exits bankruptcy would be to somehow win the chance to sell the club's television rights. Well, baseball doesn't want that. And Jamie McCourt doesn't want that. And perhaps most importantly, Fox doesn't want that.

One of the few arrows remaining in Frank's quiver was the threat of using the bankruptcy to expose MLB and its teams' books, potentially causing a rift between players and owners on the eve of what is expected to be a peaceful labor renegotiation. That option, too, is now off the table: Judge Kevin Gross is expected to reaffirm last week's decision not to allow Frank's lawyers to engage in discovery of other teams' financial information.

Shoot, Major League Baseball is threatening to terminate the Dodgers' franchise should Frank somehow maintain a grip on the team. Things really are that bad. Friend of the site Maury Brown argues that Frank's expose-the-books gamebit was like "running into the building strapped with dynamite, and if he’s going to go down, he’s going to inflict as much collateral damage as possible." And, yes, that does fit Frank's long history of stubborn refusal to search for a peaceful way out of contentious litigation.

In the past, I've expressed regret that it's had to come this far, and I still feel that way. There's nothing left for Frank McCourt to win. Even if he bludgeons the bankruptcy court into allowing an auction of the TV rights over the sincere objection over several relevant parties, and even if he can somehow win an injunction forcing baseball to stay out of his franchise, Frank McCourt would escape this firestorm with an openly hostile customer base wholly uneager to support his ownership.

There's nothing left to win.

I've spent a lot of time thinking about the failure of Frank and Jamie McCourt to settle their differences amicably two years ago. At the heart of one of the most bitter and protracted public sagas to unfold in American sports was the simple failure of two people to realize they had more to lose by fighting than they could possibly gain.

I don't know what was happening behind closed doors two years ago today. I do know what's happened in the press and in the courtroom since, though, and I suspect that fighting over a couple hundred million dollars might end up costing Frank and Jamie some multiple of whatever amount truly separated them.

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In about a month, barring some sort of resolution before then, the relevant parties will converge on Wilmington, Delaware for a week in court. Several times in the last few years, we've thought a finish line was, well, if not in sight, then at least just beyond the horizon. Each time we've been proven wrong.

As for this site...well, we're going to go back to our roots a little bit. Expect more frequent posts keying off news items, and a touch less (rambling) analysis and commentary until major developments emerge.
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Friday, September 23, 2011

MLB asks for sale of the Dodgers in bankruptcy.

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And the rhetoric intensifies. As reported by the Times' Bill Shaikin, Major League Baseball today asked Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware to order the Dodgers sold as part of the club's bankruptcy proceedings. Frank McCourt has asked the court instead to order the team's future television rights sold at auction, and his camp has long acknowledged that disposition of those rights is Frank's path to retaining the Dodgers. Among baseball's boldest language was this gem:
No one will pay the [Dodgers] to broadcast Dodgers games if the club is not part of Major League Baseball [...] Consequently, the [Dodgers'] path in this case is a dead end or worse.
Baseball has pointed out to the court that selling the television rights would have all sorts of nasty consequences, potentially including, but not limited to, the suspension of the franchise from the league. That MLB is willing to threaten such dramatic action speaks to how strongly it desires Frank McCourt out of baseball for good.

So, the question remains the same as it has been all summer: will Frank McCourt survive long enough to sell those television rights so necessary to his eventual plan for bringing the team out of bankruptcy?


We'll take a look at that this weekend.
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Monday, September 19, 2011

Back in the game; three Octobers.

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It tells you most everything you need to know about the Dodgers' ownership troubles that I could fall off the face of the earth for two months, and come back to learn that not a whole lot has changed. Of course, that's not true: I've stayed abreast of the happenings, and in touch with folks close to the situation. But still, I definitely haven't spent much time here.

So what's happened? Well, I took the bar, started my new job, passed the bar, and got sworn in (just today, in fact!).

Oh, but you didn't mean me.

The most relevant quote is one that bounced around last week, when Los Angeles County Superior Court Judge Scott M. Gordon acknowledged that "[u]ntil it gets out of bankruptcy, the baseball team cannot be sold by this court." That reflects, of course, one of Frank McCourt's chief aims in filing for bankruptcy in the first place: it put an effective freeze on the disposition of the team.

So it appears the Dodgers will head into a third consecutive offseason with the ownership question still hanging over the proud franchise's head.

If October 2009 was about revelations and October 2010 about non-resolutions, what will October 2011 bring? The bankruptcy trial is making slow progress (which is, in many ways, the idea). The divorce litigation won't refocus on the case's most compelling issue until the calendar flips to 2012. The team is somehow thoroughly out of contention despite having viable candidates for both the National League Most Valuable Player and Cy Young Awards.

.500 seems a perfectly appropriate record for a team coasting down a hill in neutral on its way to a third winter of paralysis-by-divorce. The club seems neither to be coming nor going, neither contending nor rebuilding. That will all change, of course. Someone, Frank McCourt or otherwise, will get to sell the club's TV rights. At some point, the club will win again, and winning will bring people back to the Stadium. You can't keep a team with the Dodgers' built-in advantages down forever. But, my goodness, can you try.
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Friday, July 22, 2011

Judge rejects McCourt's financing, limits MLB control over Dodgers.

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In a federal bankruptcy court sitting in Wilmington, Del. today, Judge Kevin Gross denied Frank McCourt's motion that would have allowed a hedge fund to finance the Dodgers during the club's bankruptcy proceedings. Concluding that a $5.25 million fee owed by Frank personally to the hedge fund if the financing was not approved compromised McCourt's independence and disinterest in the deal, Judge Gross ordered baseball to finance the team instead. My reactions to the ruling are at ESPN Los Angeles. The takeaway:
While Gross did not approve the deal McCourt proposed, he ordered one that will cost the Dodgers less money without appearing to enable a seizure of the club. The Order specifically forbids the financing from including "default triggers for violations of Baseball's rules and regulations."
[...]
MLB, of course, won the day on paper. McCourt won the day on paper. McCourt's motion was denied, and baseball will finance the team going forward. Commissioner Selig's office also struck a public relations blow; fans weary of the bicoastal McCourt litigation may look at MLB financing as a sign the McCourt era in Los Angeles is closer to coming to an end.
Whether that proves true depends almost entirely on the disposition of the club's television rights.
There's more analysis of what went into today's decision and further discussion of the TV rights in the article, so I hope you'll check it out.

As for me, I'll be going pretty dark from now until late next week in final preparations for and then taking the bar exam. Thanks for your kind wishes. I may pop into Twitter now and then, but unless something enormous happens, this is likely goodbye for a week.
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Monday, July 18, 2011

Paying the bills.

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In case you missed it, here's a piece that ran on ESPNLosAngeles.com last Friday about Frank McCourt's request to Judge Gordon for a reduction in his monthly obligation to Jamie McCourt. Essentially, Frank is arguing that doesn't have the means to support the couple's seven homes due to significantly reduced resources thanks to the Dodgers' bankruptcy. The heart of the matter:  

According to [Frank's] filing, Jamie McCourt has refused to rent or sell the properties, which are all titled in her name.
Frank McCourt contends that the Dodgers are his own property and the homes belong exclusively to Jamie. He would have Jamie sell or rent the residences to fund her lifestyle. In the case the court finds that both the team and the properties belong to the McCourts together, Frank has officially requested the homes be sold.
Due to the Dodgers' bankruptcy, the documents state, Frank McCourt's annual income is $5 million, which would not cover the court-ordered obligations to his former wife. Frank McCourt also declared in the filings that he has spent nearly $8 million in the past year on support to Jamie McCourt, compared to about $600,000 for his own expenses.
This issue will be heard in Los Angeles on August 10.
Across the country, Frank's attorneys also filed a motion in the Dodgers' bankruptcy case today. At issue is the source of funding that will see that the club's financial obligations are met until the bankruptcy proceedings conclude, one way or the other. Frank McCourt has arranged for a $150 million debtor-in-possession (DIP) facility through a hedge fund, though it comes with fees and a relatively high interest rate. Major League Baseball has offered its own financing, through the same MLB fund it closed to Frank McCourt prior to the Dodgers' bankruptcy filing. Baseball argues that its financing is less expensive, and therefore more responsible to the club's creditors and the game, generally.
Unsurprisingly, Frank's attorneys disagree. Saying that the court should defer to the Dodgers' business judgment in selecting a DIP financier--as is very common in Chapter 11 bankruptcies--Frank's lawyers characterize Bud Selig as "not driven by the economic motives (or elementary practices) of a standard DIP financier and instead [...] is motivated by non-economic, frankly personal objectives." Translated: the Commissioner wants Frank out, and MLB's proposed financing is merely a trap designed to lead to McCourt's ouster.
That trap operates, McCourt argues, by setting Frank up to fail. "The Debtors also remain justifiably concerned that, if any default occurred, the Commissioner would be unwilling to grant a waiver that might otherwise be available from a lender concerned with profit and repayment of the loan rather than the ulterior and strategic goals of the Commissioner," state Frank's attorneys in today's filing.
A United States Trustee has sided with Major League Baseball, citing concerns over fees and other aspects of Frank McCourt's preferred financing. Ultimately, if Frank is not allowed to proceed with his own financing, the door will be open for MLB to exert a level of control over the Dodgers as yet unattainable due to the protections afforded the club by virtue of its bankruptcy filing.
Courts are typically quite deferential to a debtor's choice of DIP financing. Indeed, the chief purpose of the system is to protect creditors, and an attorney for Major League Baseball has admitted in court that the club's creditors are expected to be paid in full. Frank's attorneys agree, calling the team "wildly solvent." That may be true following the disbursement of the first $60 million of the team's DIP financing, but it was very doubtful immediately prior to filing the case. Indeed, if the Dodgers were technically solvent as of the commencement of the bankruptcy, there might be significant questions as to the good faith of the filing itself.
The outcome of Wednesday's hearing will not necessarily be determinative of the case, generally, or of the future of McCourt ownership of the Dodgers. Even if baseball wins, Frank's suspicion of baseball's motives is well-noted and I would not expect Judge Gross to allow MLB to assume immediate control of Dodgers operations. Should Frank win, he would still have to overcome the significant hurdle of baseball's objection to his marketing of the club's future television rights. Remember, Frank's plan for the Dodgers to emerge from bankruptcy healthy and under McCourt control depends almost entirely on his ability to sell the TV rights over baseball's currently-strict objections. A win Wednesday means he's likely to at least have a chance at that. 
We'll have more, here or elsewhere, tomorrow.
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Friday, July 15, 2011

Updated McCourt Enterprise org chart.

Tuesday, July 5, 2011

The information battle begins.

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Barely a week after sending the Los Angeles Dodgers into bankruptcy, Frank McCourt has commenced with his effort to make baseball open its books. In a motion and supporting papers filed today in the United States Bankruptcy Court for the District of Delaware, McCourt's attorneys lodged requests for a wide range and deep volume of information. Among the Dodgers' requests:


  • Pretty much everything to do with Major League Baseball's investigation of Dodgers' operations.
    • McCourt is especially concerned with the details behind the MLB-appointed monitor, Tom Schieffer, and even asks about Schieffer's potential interest in acquiring a portion of the Dodgers. Frank's filings also indicate a suspicion about Joe Torre's communications with Major League Baseball concerning Dodgers operations.
  • Frank McCourt seeks information regarding baseball's rejection of the Fox deal.
    • The Dodgers asked baseball for details of other teams' TV deals. Specifically, McCourt wants to openly compare the proposed Fox deal to those entered into by the Mariners, Rangers, Astros, Mets, and one currently being explored by the Padres. McCourt's goal is to show that the Fox deal was favorable to the Dodgers and that Selig's rejection was motivated primarily by a desire to force Frank McCourt out of baseball.
  • The Dodgers also want information about steps taken by baseball to squeeze McCourt financially.
    • In addition to denying McCourt the Fox deal, the Dodgers' filing also indicates that MLB cut off the Dodgers from the MLB-offered seasonal line of credit. McCourt also claims that in the weeks leading up to the Dodgers' bankruptcy filing, baseball changed its rules for obtaining debt financing, forcing Frank's hand further. Frank also asked baseball to turn over any documents about MLB's plans to remove McCourt as owner or even terminate the franchise altogether. 
  • Finally, McCourt also wants baseball to reveal its handling of other teams in periods of financial stress.
    • Frank wants to know about baseball's approval of the Rangers' prepackaged bankruptcy, how baseball dealt with the Mets during their recent struggles, and baseball's action (or inaction) concerning other teams in violation of the sport's debt service rules.
McCourt's goal in these information requests is two-fold. First, he wants to begin establishing his claim that he has been treated wrongfully by Bud Selig and the Commissioner's office. Second, he would like to make this process as painful as possible for MLB. Forcing baseball to open its books might be painful, indeed.

For its part, attorneys for Major League Baseball have also filed their own extensive requests for document production. Baseball seeks information primarily on the debtor-in-possession (DIP) financing McCourt arranged to get the club through its bankruptcy. MLB, of course, seeks to persuade the court that the financing is on highly unfavorable terms, and that the interest and fees charged are unfair to the team's creditors. 

Baseball also seems to cast doubt upon the McCourt camp's assertion that it went to enough effort to secure affordable financing. Additionally, MLB seeks more detailed information on how the Dodgers are budgeting cash over the next few months.

Fans accustomed to the McCourt divorce's slow trek through court might be surprised at how fast the bankruptcy is unfolding. Indeed, both Frank McCourt and MLB's document production requests call for full responses very soon. The scope of discovery is a fight of its own, but the haste with which the sides are proceeding is indicative of the urgency of the situation. Either Frank McCourt gets a TV deal pushed through, and relatively quickly, or he'll have a hard time preparing an approvable plan to emerge from the bankruptcy.

One of the more interesting developments on the horizon is a liquidation analysis of the five McCourt entities currently in bankruptcy. Prior to gaining approval of any plan, the Dodgers must make a showing of what the creditors would receive if the assets of the five companies were sold at auction. The Dodgers' plan will then be judged by the extent to which it is more beneficial to creditors. It is in this liquidation analysis, at the latest, that McCourt and MLB might first square off on the related-company transactions implicating the Dodger Stadium parking lots and the right to sell non-premium Dodgers tickets.
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