Tuesday, December 1, 2009

Hop in the wayback machine.

It was winter of 2003-04, but the arguments were heated.

It was about Dodger blue, but the issue hinged on whether McCourt had enough green.

Whoa what happened...I blacked out for a second and turned into Bill Plaschke! Really though--I punched up the old 'puter seeking a little bit more background on Frank McCourt's original purchase of the Dodgers. None of what follows is new information by any means, but maybe the revelations of the last couple months will shine a different light on the past.

I suppose we should start in the winter following the 2001 season*. The Yawkey Trust, which owned the Boston Red Sox, had solicited bids from prospective buyers the previous summer. At least six different candidates emerged. I know this will shock you--no way you could have known this was coming--one of the groups was led by Frank McCourt, Boston real estate developer. McCourt's bid was anchored by the promise of a shiny new ballpark on his waterfront acreage. Early in the process, McCourt partnered with Lehman Bros. (yikes!) on the bid, but he later relegated the investment bank to an advisory role (which: still terrifying). McCourt then teamed up with multiple Boston-area venture capital firms. The premise behind the bidding process, according to the Yawkee Trust, is that the Trust was duty-bound to sell the club to the highest qualified bidder.

*You might remember this season by such events as: the christening of Mr. November; the peak of Bret Boone; or Barry Bonds' 73 home runs.

Questions about McCourt's ability to finance a purchase dogged him throughout the process. While the Red Sox grudgingly allowed him access to team financial records for the purpose of preparing a considered bid, there was a great deal of skepticism that this king of leverage could make it work. The South Boston property on which the new park would be built was the chief weapon in Frank's attempt to buy the club. City officials were adamant that McCourt's land was the only acceptable site for a new Red Sox yard in the attractive South Boston area.

Frank eventually dropped out of the race when he couldn't adequately satisfy the Yawkey Trust's questions about how he could afford the purchase. Though he made a last-minute attempt to partner with Miles Prentice, a New York lawyer who had submitted the highest nominal bid, the package did not impress the Yawkey Trust, still uncomfortable with the financial chicanery required to make the deal work. The Trust sold the Red Sox for $660 million to a group led by John Henry and Tom Werner. Incidentally, the Henry/Werner bid was, at least at one late stage of the process, the only bid which proposed keeping the Red Sox in Fenway Park.

Some observers blasted Major League Baseball for the deal, characterizing it as a sham sale, a process designed behind the scenes to award the franchise to Henry and Werner, who had previously held ownership interests in the Marlins and Padres, respectively. Major League Baseball's owners are famously protective of  their small fraternity, and many alleged that a desire to shun outsiders drove the sale to Henry and Werner. It didn't hurt, these observers claimed, that the new group was pro-revenue sharing.

So Frank McCourt wasn't allowed to join the club. But funny things happen, and three years later, News Corp. desperately wanted out of the Dodgers. Unlike the Yawkey Trust, which was the last vestige of Yawkey family ownership, News Corp. didn't have any ties to the franchise outside of its investment. For a variety of reasons, the competition for the Dodgers did not rise to the level of the Red Sox sale. While such luminous names as Alan Casden and Red McCombs were bandied about, a bidding war of the Boston scale never materialized. When Frank McCourt, now a familiar figure among baseball officials and owners, emerged with an offer, Major League Baseball had everything it needed.

Sort of.

As you know, McCourt hardly came to the transaction with cash in hand. Los Angeles observers balked. It wasn't enough, they said, that McCourt was a New Englander trying to buy the quintessential Southern California sports franchise. He was trying to do so on the cheap! Hollywood isn't good with cheap. Nevertheless, the sale to McCourt--an apprentice member of the owners' club through his bid for the Red Sox--proceeded on schedule. Though questions about his wealth continued to follow McCourt, News Corp. had so devalued the franchise through the forced nature of the sale that Major League Baseball saw it fit to rubberstamp the purchase.

Late in the game, of course, billionaire developer--and actual Southern Californian--Eli Broad offered to pay, mostly in cash, the same purchase price as McCourt had agreed to finance through a variety of debt instruments. However, much as Frank now scoffs at Jamie's claim that she will buy Frank out of the Dodgers, Major League Baseball essentially told Broad that the Dodgers were no longer for sale. With nothing but formalities separating Frank McCourt from a leveraged purchase of the Dodgers, Broad's offer was largely ignored.

So what does it all mean?

Well, in the most immediate sense, the transaction cost the Dodgers Vladimir Guerrero. McCourt's business plan, according to insiders, projected the Dodgers' payroll to be in the $65-$75 million range, allowing reasonable increases as the market advanced. An annual commitment of $10+ million to Guerrero would screw up Frank's projections and jeopardize the sale.

That's how close it was. Think about that for a moment. The sale of a $430 million dollar asset would fall apart if another couple million bucks hit the payroll. Nevermind the obviously stone-age mathematics behind this; we, as a baseball community, had yet to accept that we could assign dollar values to performance. Just consider that Frank had so little room to spare on the financing that he couldn't project his payroll $10 million higher (Guerrero would cost more than that, but deduct the cost of carrying another player) and expect MLB to approve the sale. Scary, right?

Now consider that the Dodgers' opening day payroll was over $92 million. Without Guerrero.

It's awfully easy to jump to some pretty aggressive conclusions here. The plan approved by Major League Baseball figured for $65-$75 million in payroll. The Dodgers could not pursue Vlad Guerrero, who would make $12.5 million for the Angels in 2004, because it would alter the financial projections so dramatically as to jeopardize the McCourt bid. After McCourt had sufficiently convinced the owners' group to approve his bid, and free of the strictures of the approval process, McCourt still authorized an opening day payroll $17-27 million higher than he believed Major League Baseball would approve.*

*It should be noted that McCourt characterized the failure to sign Guerrero as a News Corp. decision and that he personally had set an unofficial $100 million cap on 2004 payroll. Under this theory, it was News Corp.'s fear about what the commitment to Vlad might do to the bid which kept the Dodgers from signing the then-great hitter. For the sake of this discussion, this is a distinction without a difference. One of the parties involved was afraid that an extra $10 million in payroll might torpedo the sale.

Fun stuff. From the outside, it sure looks like Frank bought as much house as his mortgage lender would allow, and then took on even more debt to finance further capital improvements after taking deed to the property. Now, in the absence of perfect information, this is all just conjecture. But I started this morning wanting to know a little bit more about how Frank came to own the Dodgers. This whim certainly unearthed some interesting information. The Dodgers are certainly much more profitable now than they were in the News Corp. days. I don't have a great deal of concern about the solvency of the franchise. But once upon a time, the margin for error might have been as little as $10 million bucks.


  1. A couple things...

    I doubt that Lehman Bros was a partner with McCourt for the Red Sox bid, as much as McCourt's hired gun, to raise short term capital, help with sales transaction, stabilize the debt, by selling it to institutional investors. They don't want to be a partner as much as the multi million dollar fees in sealing a $700 million deal. Much like Goldman Sachs has a 20% ownership in YES, but they are doing this so they can sell it to a higher bidder... All serious bidders for a sport franchise will signed up an investment bank like Goldman Sachs, Credit Suisse/First Boston, Morgan Stanley/Chase to show that they are serious. (Lehman decided their demise by leveraging the firm in mortgage securities)

    The highest bidder for the Sox in 2001/2002 was James Dolan of Cablevision, which the main reason he was turned down, his brother owns the Indians, other owners were kind of leery of his power, (Sort of like how many owners look at Mark Cuban) and basically Bud Selig wanted the Henry Group to get the team.

    Eli Broad's bid for the Dodgers included the broadcasting rights, which as any good businessman knows is the way to have a great revenue stream. News Corp./Fox Sports turned it down, because they didn't want a competing sports channel, like YES or NESN, in a the Southern Californian market. MLB went along with the News Corp. sale of the Dodgers, because they were in negotiations with News Corp for a MLB TV contract. Talk about conflict of interest. One reason why the MLB gave McCourt a $75 million line of credit to seal the deal, because they would get it back with a Fox TV contract. Fox wanted the deal, and they found the only chump who would buy the team without the broadcasting rights...

    I don't think the Yawkey Trust looked at the McCourt group's proposal seriously, because he didn't have any serious partners, and he didn't have the money to buy the Red Sox/80% of NESN(the Bruins own the other 20% and move it to his former Boston Fort Point property, and finance a stadium.

    Selig push the sale of the Dodgers as a favor to Murdoch and News Corp to McCourt.

    I don't think Eli Broad would had been a white knight, he is a shrewd businessman, and he would had broke some china to make the Dodgers a money maker and competitive, but it is obvious that he would had been a better choice because he didn't have to finance a $370 million purchase with $430 millions in loans, and had outside wealth to finance down years.

  2. opps! I meant Charles Dolan, sorry about that....

  3. okojo--

    Thanks for the clarifications. The Boston Globe listed Lehman as a partner, which is why I referred to it as such. Interesting background on Broad's bid. He would have been an interesting figure.

    As for the Yawkey Trust and how seriously it took McCourt...they brought him into Bingham in Boston to go through the club's books. That's a fairly serious step. Maybe it was done just to appease him. I don't have a good feel for how popular the McCourts were in Boston at the time.

    The stuff about the TV contracts is interesting. Fox only bought into the Dodgers in the first place, as I understand it, to get a foothold in the Southern California baseball TV market. Fox's actions in the sale are curious...yes, they found the chump who would buy the team without the cash-cow TV network to go with it, but in doing so they severely devalued the asset. I don't doubt they're in the black on it, but I'd sure like to see by how much.

    As always, thanks for the input.

  4. McCourt could had used Lehman as a sort of a headhunter, as you mentioned trying to woo Miles Prentice in an alliance, or others as a minority partner. However, investment banks want the fees, and the investment bankers themselves want a multi million dollar cut of the fees that the investment bank gets for getting the deal done, like any merger and acquisition.

    I read about Frank's business relationship with others, and it never works out well. He doesn't play well with others. Compare to the Henry Group, who had some backbiting, but they also patch up differences...(except Theo Epstein made Charlie Steinberg to walk the plank after the 2007 season)

    Anyway, I remember reading this article at the time of the McCourts' purchase of the Dodgers in 2004...