Monday, November 2, 2009

How the McCourts came to own the Dodgers.

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(Or: Why this divorce is gonna be a beast to get through)

The purchase of an asset the size of a major league baseball team is not nearly as simple as you or I buying our morning Diet Coke.* For that matter, it's many, many times more complex than buying our houses or even our own businesses. Even among the cadre of super-wealthy folks, it's just not that easy to drum up $421 million in cash. The McCourts didn't simply hand the O'Malley family News Corp. a check drawn on the family's WaMu account. The process behind financing this purchase is especially interesting in the McCourt case, and is particularly relevant for the upcoming battle for the Dodgers.

*Yes, I'm one of those people who order a Diet Coke with their Supersized Value Meal. Deal with it.

Now, I'll warn you in advance: this stuff is neither easy nor particularly interesting for most folks. However, this sort of thing is my bag, baby, and I want to explore it. If at any point you're not feeling it, the safety word is "Broxton."* Say it, and you'll be whisked off to the usual world of snarky posts about Jamie's demands for a big-enough swimming pool. If you care to dive further down the rabbit hole, I think you'll be pleased with how popular you are when office holiday party conversation turns to the McCourt divorce. You'll be the envy of all your friends!

*He was awesome this year, and he's gonna be great for a while. I know he had a couple high-profile blowups, but we're not talking about Brad Lidge here. This guy is a stud. Treat him as such.

The McCourts amassed their considerable pre-Dodgers wealth primarily through the development of 24 acres of real estate in Frank's native Boston. I use the term "development" very loosely, as the land is primarily used for surface parking lots. You know, the kind in or near downtown areas where it costs more to park than to buy your lunch. As you can imagine, these things are cash cows of investments in robust economic times, because they double-pop: as the land value increases, you can raise parking prices while growing equity in the property itself. This 24-acre parcel of real estate was the McCourts' primary asset heading into the purchase of the Dodgers.

The McCourts bought the Dodgers from the O'Malley family News Corp. in 2003 for $421 million. This sum was assembled through a series of financial instruments ranging from the mundane to the very complex. We'll take it chunk by chunk until we've reached the purchase price.
  • $150 million (Bank of America commercial loan). This piece is pretty straightforward. B of A loaned one or both McCourts $150 million and took a security interest in the club and its real estate. From the bank's perspective, this was a fine deal, because the bank was significantly over-secured. This means that if everything went terribly wrong, there would still be enough value in the collateral to cover the loan.

    • Current status: taken out. See below.

  • $125 million (Fox Sports [News Corp.] two-year note) Fox, in a testament to how desperate it was to get out of the Dodgers, financed nearly half of the purchase price itself. In exchange for the $125 million short-term loan, The McCourt Company granted Fox a security interest in the 24 acres of Boston land. If McCourt defaulted on the terms of its note to Fox, Fox could take the Boston property.

    • Current status: In February of 2006, McCourt transferred the property to Fox (a foreclosure for tax/legal purposes), with Fox taking possession in exchange for forgiving the $145 remaining on the note. Evidently, the revenue generated by the property wasn't sufficient to cover the interest on the note. At or near the time of foreclosure, Fox discovered over $58 million in previously unreported obligations owed by the property. In further evidence of Fox's determination to be done with the Dodgers and McCourt, Fox assumed that extra debt. 

  • $75 million (MLB revolving note) This piece is a fairly standard revolving line of credit from MLB's fund for team owners. It is likely to require only interest payments.

    • Current status: unknown.

  • $40 million (Fox four-year note) This loan, another concession from Fox, was secured by McCourt personal assets. Presumably, this does not include the family residences, which were supposedly not offered as collateral in the Dodgers purchase.

    • Current status: Taken out. See below.

  • $31 million (Fox three-year convertible note) Like the last chunk, another Fox loan secured by McCourt personal assets.

    • Current status: Taken out. See below.

Under the terms of the agreement, Fox was also obligated to kick in rebates of $50 million over the first two years of the financing, effectively reducing the purchase price to $371 million.

So, if you're counting at home, the above adds up to $421 million in financing...for a $371 million purchase. That, friends, is a little scary. And there's more. In May 2005, McCourt announced a new, $250 million 25-year note which took out B of A and $71 million of the Fox debt. This left a known debt load of $499 million.* This new financing, known as a private placement, was provided by an unidentified group of institutional investors, such as pension funds and insurance companies. The terms of the loan--5.66% fixed for 25 years--are relatively favorable to McCourt. The collateral for this new loan was reportedly the 300 acres of real estate surrounding Dodger Stadium--not the club itself. Importantly, one of the provisions of the private placement was that control of the Dodgers would not change hands.

*At the time of the private placement, McCourt refused to acknowledge remaining debts secured by the franchise or Dodger Stadium. There is a $69 million gap between known facilities as of May 2005 and Forbes-reported debt load.


As noted above, in February 2006, McCourt transferred the Boston property to Fox, erasing the last $145 million due Fox while reducing McCourt's holdings by $115-$200 million--reported estimates of the actual worth of the property.

In April 2009, Forbes estimated the value of the franchise (including surrounding land) as $722 million with a debt total a little shy of $420 million. Where does that $420 million come from? I've been told the $75 million to Major League Baseball is mostly gone, which leaves quite a difference between the $250 million private placement we know about and the $420 million Forbes reported. My guess? The private placement facility was expanded considerably as the real estate bubble grew and everyone thought our property would appreciate forever.

The McCourts' equity in the Dodgers is likely somewhere in the $250-350 million range. Assuming Jamie's $400 million estimate of the couple's other assets is correct, that makes the couple's net worth approximately $700 million, not quite the $1.2 billion suggested by Jamie. And is it that unreasonable to think that her $400 million "other assets" figure might have omitted debt, just as the $800 million Dodgers figure did? It's entirely possible the couple's net worth is much closer to $500 million--still a very healthy amount, but one that poses significant problems for either of the two to own the Dodgers without the other. We don't know nearly enough about the McCourts' other personal assets to draw any hard conclusions, but all of the significant residential assets are mortgaged or otherwise pledged in various financing facilities.

And don't forget that provision of the private placement that requires control of the Dodgers to stay the same. If the Dodgers are sold to a third party, that debt might not be able to travel with the team. Furthermore, depending on a judicial determination of whether the team is jointly owned by the McCourts or solely owned by Frank himself, the unidentified investors may be able to call the balance of their loan immediately.

Conclusion: so what do we know?

We know that the McCourts aren't worth anything close to the $1.2 billion Jamie suggests. At most, the couple seems to have something approaching $750 million in total net worth ($400 million in "other assets plus ~$350 million in equity in the Dodgers). However, it is my guess, based on the loan balances due on the residences and their history of operating heavily-leveraged businesses, that the couple's net worth is under $600 million.

If the team is determined to be an asset of the marriage, either partner would have to become heavily leveraged to take the other out. If no agreement can be reached and the court orders the Dodgers to be sold to a third party, expect a bit of a discount on the purchase price, leaving both McCourts with even less.

If the court upholds the asset-transfer agreement (or post-nup) purporting to transfer the Dodgers to Frank and the residences to Jamie, expect her to walk away with a net worth of well-under $100 million. Is it any wonder she wants a half-mil a month now?

I started this post with the intent of better understanding the financial position of the McCourts. I think that, by accident, I have succeeded. I am certainly more confused now than I was two hours ago. The takeaway here is that unwinding this marriage is going to be messy, and we won't run out of content any time soon. I feel I've done a poor job articulating what I've learned, so if you have any questions, feel free to hit me up in the comments or at DodgerDivorce@gmail.com.

What I really want to emphasize is that the McCourts aren't worth as much as you think, and breaking up this marriage is going to cost them both dearly.

16 comments:

  1. Change of control provisions on unsecured bonds are typical for leveraged transactions. The new buyer will just have to find new unsecured lenders.

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  2. Joe -- if the new buyer has to find new unsecured lenders, wouldn't that be a bit of a problem in the current fiscal environment?

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  3. Joe,

    The private placement was secured by the 300 acres of land surrounding Dodger Stadium. I'm pretty sure that, in the event of a purchase, the loan would either need to travel with the team (with the group's consent) or be taken out by a different loan.

    Josh

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  4. If you think you got more confused over two hours, would you be particularly surprised to find that they had even more loans? It's apparent that they were able to spend what they wished by having money constantly in motion. Especially in the case of a business the size and motility of the Dodgers, there is a large amount of money zipping through various accounts at all times. In a situation like that, spending a couple of million or more a month can disappear as "rounding", without actually being earned and retained. When this is all sorted out and becomes public, I will stake a claim right here on Nov. 3 that your estimates of net worth are too HIGH.

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  5. Thanks for posting this... The Real Estate Stalker has a little piece on the McCourt residential assets...

    http://tinyurl.com/yl9qbbl

    I have been following the McCourt financing of the Dodgers for some time. I was always perplex on why someone would buy the Dodgers without securing the broadcasting rights.

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  6. I'm a touch confused by this:

    So, if you're counting at home, the above adds up to $421 million in financing...for a $371 million purchase. That, friends, is a little scary. And there's more. In May 2005, McCourt announced a new, $250 million 25-year note which took out B of A and what remained of the debt to Fox (after the foreclosure on the Boston property). This increased the debt load to $521 million on a $371 million purchase.

    If they took out $250 million to pay off $221 million (excluding the foreclosed loan secured by the Boston property), don't they have a debt load of $325 million (including the MLB $75 million), not $521 million?

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  7. The Oriole Way--

    As the saga goes on, and I get better (and lower profile) information, the numbers move around a bit. As I currently understand things, the $250 million (secured by the 300 acres alone) took out the $150 million from B of A and the remaining short-term Fox debt of $71 million. McCourt declined to quantify financing secured by the team. Since that time, it sounds like the MLB line has been paid off, but there remained in April $420 million of debt, only $250 million we could identify. The private placement could have been expanded, or there could be debts secured by the franchise that McCourt wouldn't discuss in 2005.

    I appreciate the comment.

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  8. I've changed the paragraph in question to better reflect the most accurate information I have this morning. I thank those who have commented and written in--there are a number of different accounts for how much financing there is (or has been at a particular time). What is currently posted is the product of the best information I have.

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  9. You mean the same Brad Lidge who has sent your team packing the last two years? Yeah, you really made a statment there. It read: I'M A BITTER DODGERS FAN AND WISH MY BALLCLUB COULD CARRY THE PHILLIES JOCKSTRAPS

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  10. Another interesting question relating to essentially mortgaging the 300 acres around Dodger Stadium...how would a lender collect or foreclose on that? If the loan defaults, now you do not own the Dodgers or the stadium, but you own the parking lot? To do what, build houses on it? It seems like a piece of collateral that obviously has value, but it useless in a certain way because there isn't much you can do with it.

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  11. The 300 acres, to my knowledge, includes some undeveloped land in the Elysian Hills area. I don't know if the parking lots are Stadium land or 300-acres land. Whatever the acreage was worth in 2005, I can't imagine the value has held up. Development, as we all know, sucks right now.

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  12. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

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  13. I know this is an old post but I'm with dodgrfan.
    Everything we have seen just shows a pattern of spending more and more and not paying much off. The Lover's net worth will be less than we think and there is going to be trouble over securing assetts.

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  14. Very interesting material. Well when there is so much a new. Many thanks, simply class

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  15. His research has shown you that our "erroneous projections of the mind" is closely associated with future real events, but where did the belief that the first cause second?

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