Tuesday, May 18, 2010

On the money trail.

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Over at Fanhouse, John Weinbach offers some troubling news:
Over the past 18 months, the Los Angeles Dodgers paid nearly $4 million in "consulting services" to [the John McCourt Company], an entity that has done virtually nothing for the club, even as the team has made a concerted effort to raise ticket prices, trim payroll and acquire players on the cheap. Moreover, the club paid two of Frank and Jamie McCourt's adult sons large salaries -- $400,000 and $200,000 per year, respectively -- for services that are undefined and could not be described by either Frank or Jamie McCourt, according to court documents filed in the couple's divorce case. 
FanHouse has also learned that the Dodgers' ownership includes two limited partners who provided loans to help the McCourts finalize their purchase of the club in 2004, according to people familiar with the matter. One of the limited partners is Franklin Weigold, a long-time executive with Analog Devices, Inc., a Norwood, Mass.-based maker of electronic equipment. Weigold lives part of the year in Los Angeles and was also part of the McCourts' failed bid to purchase the Boston Red Sox in 2001. 
It is not clear who the other limited partner is, but that entity and Weigold both own convertible bonds in the Dodgers that would transfer into "sizable" equity in the team in the event of a default on the loans, according to the source. (The McCourts have not missed any of the payments since they became owners six years ago.) 

Weinbach also goes on to note that the consulting fees were nominally for services related to exploring development of the acreage surrounding Dodger Stadium. This land, of course, has had several suggested purposes over the years, from high-end condos and retail to a potential NFL venue. Much of the land is currently being used as a state-of-the-art 405 Freeway simulator, around 80 times per year.


The crux of the problem seems to be that artificial cap on Frank's income. You know, the one he hid behind when he claimed poverty and which Jamie complained was a complete sham. In fact, the entity which has paid the John McCourt Company has been Blue Landco, LLC, the very entity Jamie suggested Frank would use to get around the $5 million cap on his income. Jamie's attorneys are describing the John McCourt Company as a "slush fund," implying it is nothing more than a holding tank for soft cash to be used at Frank's discretion. 


Perhaps the more surprising allegations concern the limited partners whose interests in the club were previously unknown. As recently as 2009, documents submitted to Major League Baseball described the Dodgers as 100% owned by Los Angeles Dodgers, LLC. The rest of the chain of ownership is below:








































If you're following along at home, the Dodgers run through:

  • Los Angeles Dodgers, LLC 
  • Los Angeles Dodgers Holding Company, LLC
  • LA Holdco LLC
  • LA Partners LLC
  • The McCourt-Broderick Limited Partnership
  • The McCourt Company, Inc.
  • Frank H. McCourt, Jr.
Simple it ain't, and no mention of Weigold. The Dodgers are standing behind the above maneuverings, asserting that Frank McCourt owns 100% of the team. "Ownership" is not a concrete term; what is, after all, when lawyers get involved? It's important to remember here that the limited partners' convertible bonds have not turned to equity, as Frank (and/or the club) has not defaulted on the terms of the offering. It wouldn't surprise me one bit, though, that somehow losing half the club in a divorce could be a default event, triggering the conversion of debt to equity.

Basically, things just look a bunch messier today than they did yesterday. One has to wonder what the Commissioner's office knows of this arrangement. The Major League Constitution provides, "A sale or transfer of a non-control interest in any Club shall require only the approval of the Commissioner." Here, the argument would likely be whether offering debt in the form of convertible bonds constitutes a transfer of control. It's entirely possible the club wouldn't have to seek Baseball's approval unless the bonds converted to equity and a transfer of a non-control interest occurs.

The questions I usually get every time this gets more and more complicated concern the potential for disaster. Well, in this case, I'd have you look a thousand-and-some miles to the southeast, to Arlington, Texas. There, a bitter battle has erupted between owner Tom Hicks, his and the team's creditors, and Major League Baseball. MLB has essentially threatened to invoke a little-known power to seize the team "in the best interests of baseball," leaving the creditors with a bunch of claims against Hicks and his non-Rangers assets. Which: best of luck, guys.

As Craig Calcaterra has noted, this would be a sort of nuclear option, with baseball-wide ramifications. After all, what does the market for lending money to teams look like after Baseball shows a willingness to forcefully strip remove a team from creditors' reach "in the best interests of baseball?"

I'd urge you not to take this doomsday scenario too seriously at this point; we're a ways off from talking about Baseball seizing the Dodgers--for better or worse, I suppose. The takeaway here is two-fold: first, financing of baseball teams and ownership groups is more complicated than most thought. Second, if this sleeper debt turns into sizable equity, the entire process gets that much more twisted and we're left much further from organizational stability than we expected.

And, really, I think our expectations have been pretty damn low the last several months. 

I've heard for months now that there were shoes left to drop, and I guess today's news makes those claims prophetic. There are other fingers in the club's ownership, despite repeated assertions to the contrary. And it looks like Jamie's contention that Frank was skirting the lender-imposed caps on his income might have had a little bit of truth. Hard to say where this will lead, and how the club's other creditors might react to these revelations. Isn't it just bitter...right when the team looks like it'll never lose again, we're hit my more McCourt chicanery. 
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8 comments:

  1. So, what is the BEST case scenario? Is it realistic that the team could be sold to a well-heeled new owner without endangering the team itself, the Stadium, or the land around it?

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  2. Excellent Post, Josh. The limited partner was news to me. Weigold could be a step above the private placement investor.. Anyway great job in showing some of three card monte games that the McCourts have been using to shuffle the money..

    I think the Dodgers make enough yearly to cover their debt repayments. The problem is taking on more and more debt, and hocking the collateral in a couple loan deals. I guess the McCourt business plan was to develop the land in the Dodger Stadium property, get the rents from the leasees to pay off their loans. However, it seems they just need the loans to keep the franchise afloat.

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  3. In response to Humma Kavula..

    The best case scenario is that Frank McCourt holds out to 2013 to 2014. He can sell the club and the broadcasting rights in one package, without spending a dime on the broadcasting rights. The price of selling the club will reach to $800 million to a billion with the broadcasting rights in the second largest media market in the US, and one of the largest in the world. Frank can pay off the loans with the sale, the banks are happy, they made money, and a competent management group can maximize the Dodger's potential.

    Any sale of the Dodgers will include Chavez Ravine and the Stadium. My guess is that the Dodgers are worth $475 to $550 million without the broadcasting rights, and Frank McCourt isn't going to sell cheap, unless forced to, so he can pay off his loans, the capital gains, and make a profit of some sort. He went down to the bitter end with his South Boston Property, trying to sell it for $250 million. Fox foreclosed on it, and sold it off for $200 million.

    Also, any potential buyer/buyers of the team are going to have a very hard look at the books, which may scare off potential buyers. Baseball is a tough business, which is why clods like Frank McCourt think they can succeed in it. Obviously he can't if his wife is getting out to get her share, and the team is on the hook for hundred of million in loans.

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  4. From the sound of this, the best case scenario is for the MLB to step in and exercise their nuclear option. Now facing these private debts and Jamie, Frank would then be forced to sell sooner than later. This "doomsday scenario" would be more like "answer to our prayers."

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  5. There are plenty of rich bozos with an itch to own a ballclub. Peter Angelos. Donald Sterling. Careful what you wish for.

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  6. The McCourts are nothing but carpetbaggers from the bowels of Boston. I miss the days of O`malley family ownership. The parking and tickets wers resonable, the consessions were also reasonable, and every once in a while the Dodgers would win a championship. But like going from childhood to adulthood the whole dodger thing has become complex. Fox traded Mike Piazza behind the back of then Dodger GM Fred Clare.The dodgers had the best record in baseball before that trade.Piazza turned out to be the greatest hitting catcher in baseball history.Then comes the McCourt family. The ticket prices have gone up three to four fold since the McCourts took control. The parking prices are very high, and the dodger dogs which are way overpriced are made from hoofs and knuckles and rectum parts. To top matters off The Images of past dodger greats were taken off the walls so McCourt could sell advertising. What does my rant have to do with the price of tea in china? here it is. Getting a new owner does not mean that the Dodgers are going to reestablish there farm system or retain there pricey free agents. You can get an owner to go the other way which we have seen from Fox and the McCourts. These people are mercenary business people without any Integrity and the biggest shmuck in the deal is the fan.A dodger game is a destination spot on a summer night in LA so it does not matter if the team is bad, they will still draw close to 4 million and be among the elite teams in attendence.The yankees understand they are the yankees and though there are tough periods for the team, the Steinbrenners go out and get what they need to become champs again. There is no shortage of fans for the Yankees, and the steinbrenner family sticks it to the fans with everything being so expensive but the Yankees always have great teams, and they win there share of championships. Let us hope we can get rid of the McCourts and get owners like the steinbrenners here.

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  7. this is why i never trust the owners who say they are losing money. Mcourt has been siphoning money out of the team to his own pocket. Kind of sounds what the mafia ir the columbians do to "wash" their money. I wouldn't be surprised if Mcourt is going to all the concessions stands, taking the cash and saying 25 percent of the food was "spoilage"

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