Wednesday, March 23, 2011

Baseball's synchronized dive into debt.

National writers have tackled issues related to the McCourt ownership with varying degrees of success. Certainly, folks like Yahoo! Sports' Tim Brown, ESPN the Magazine's Molly Knight and Sports Illustrated's Lee Jenkins have added a whole lot to the discussion through their reporting and insight. Joining their ranks are Forbes' Monte Burke and Nathan Vardi, who have written an excellent article detailing the massive debt loads shouldered by, among other franchises, the New York Mets and Los Angeles Dodgers. Of debt in baseball generally, they write: 
[Bud Selig], derisively known as “the Steroid Commissioner” for the blind eye he turned toward the artificial bulking up of the players throughout the 1990s and early 2000s, now faces the possibility of becoming known as “the Debt Commissioner” for the ballooning of franchise IOUs under his tenure and for letting teams sidestep league rules on debt limits. [...] MLB has a rule that prohibits teams from operating at debt levels greater than ten times operating income (Ebitda), but it’s enforced arbitrarily and is easy to get around. 
Let's take a break and reflect on what "enforced arbitrarily" means: the Commissioner can circumvent the rules to offer a life raft when he desires, but has written authority to deny the same if he so wishes. That, in a nutshell, looks like what has happened with the Dodgers this offseason. Going on: 
FORBES estimates that the Dodgers’ value has nearly doubled to a current $800 million under his ownership. But the debt increased, too, and now stands at 13 times Ebitda, a problem that came to light in late 2009 when Jamie McCourt filed for divorce. [...] [W]hat’s clear from the court documents is that Frank McCourt used the team as collateral to rack up $459 million in debt from 2004 to 2009.
Over that period McCourt took $108 million of the money in personal distributions and funneled it into the couple’s real estate purchases.
Now, we've known about this for a while. But one thing we haven't touched on too heavily is what the debt load means. While the ratio of debt to equity has decreased over time--which was just about a given, seeing as how the McCourts put little to no cash into the purchase of the Dodgers--it can still swallow revenue whole. Debt service appears so great as to leave little cash for the club to use or other purposes.
You'll also recall the Dodgers' practice of monetizing ticket sales revenue, in which the club took a cash payment up front in exchange for pledging future ticket revenue as security for that loan. It's, in many ways, similar to what Frank McCourt attempted to do with the Dodgers' TV rights. Both the financial information revealed through the divorce and the types of financing mechanisms the club has pursued indicate that there just isn't much free cash floating around.
Concerning the financial health of Major League franchises, Rob Manfred, an MLB vice president, had this to say to Forbes: “Nobody outside the game knows what was done or not done with respect to any individual club ... I don’t think anyone outside the game is in a position to make a judgment as to how the debt-service rule has been administered." I particularly enjoyed Craig Calcaterra's response at NBC's Hardball Talk:
Really? No “you’re wrong,” or “baseball ownership is healthy?” Forbes comes to you and says that it’s writing a story about how teams routinely circumvent the debt ceiling rules and are doing so at tremendous risk and peril, and you’re really going with “how would you know?” 
The problem with Manfred's response, as I see it, is what we do know. We know about the Dodgers. And the Mets. And the Rangers. And, to a lesser extent, teams like the Diamondbacks and Padres. I would like to think that somewhere--perhaps down the street from me in Minneapolis?--there is a franchise doing things the right way. But I think it's pretty telling--and plenty ominous--that only bad news ever comes from exposing an MLB franchise's books to daylight.

Monday, March 21, 2011

On the Dodgers TV rights.

Not a ton going on publicly at the moment, but in the interest of exploring one facet of the divorce and to engage in shameless self-promotion, I am passing along an article I wrote for this week's Variety. An excerpt:
In January, Fox offered Frank McCourt (widely thought to have severe liquidity issues stemming from his divorce) an advance on the existing Prime Ticket deal to help cover operating expenses. More dramatically, according to a February report in the Los Angeles Times, Fox agreed to loan the Dodgers an additional $200 million -- taking 2014-17 broadcast rights as collateral -- but Major League Baseball refused to allow the deal.

It could be that MLB's refusal of Fox's proposed life preserver to the Dodgers actually bodes well for the network's long-term chances of keeping the Dodgers. It's harder and harder to envision a scenario at this point in which a McCourt would have the cash to invest in a brand new network -- though if new owners come in, anything's possible.
So, yeah, there you go. Click on through to see the whole thing. And thanks to Dodger Thoughts' Jon Weisman for the opportunity.

Tuesday, March 1, 2011

Jamie McCourt wants a say, part 2.

I wondered a few weeks back how Jamie McCourt felt about the advance Frank McCourt took on the Dodgers/Fox deal. Well, if that ticked her off, Frank's attempt to collateralize the 2014-17 TV rights rendered her just about apoplectic. Here's Shaikin, in what can only be described as one of the more entertaining stories to come out of the divorce thus far:
Jamie and her advisors were "shocked" to read that report, according to the filing. Her lawyers called it "outrageous" that Frank had not disclosed the Fox discussions to Jamie and "equally outrageous" that she needed Selig to "protect the franchise's best interests given that California law imposes that very duty and obligation upon Frank, since he runs the Dodgers."
In the filing, her attorneys asked that the court order Frank to turn over all documents related to the Dodgers' broadcast rights negotiations, cash advances, loan applications, financing arrangements, debt payments and schedules, and audited financial results.
You can bet that Jamie's got a squadron of forensic lawyers and accountants ready to take a good, hard look into just how money's been flowing in and out of the constellation of entities that make up the McCourt Enterprise. And I have little doubt about her ability to seek all kinds of information. As I wrote a couple weeks ago, California Family Code calls for a spouse managing a community property business to give the other spouse equal access to information about the business upon request. That duty seems to run, in the divorce context, until the marital assets are properly divided. But don't take this law student's word for it: here's Jamie's lawyers' work instead!
It is outrageous that Jamie and her counsel have to rely upon the news media for information that Frank is affirmatively obligated under California law to provide before the fact. It is equally outrageous that Jamie has to rely upon the good offices of the MLB Commissioner to protect the franchise's best interests given that California law imposes that very duty and obligation upon Frank as the spouse with primary management and control of the Dodgers assets.
So yeah, Jamie's upset. And she ought to be: pledging the 2014-17 television rights would necessarily restrict the creation of a potentially lucrative regional sports network. Frank's lawyers have not had a chance to file a formal response to Jamie's motion, but their letters indicate they believe Jamie's requests overly broad, presumptuous, and in themselves potentially damaging to the Dodgers, in that "sensitive business matters" ought not be discussed in public.
Frank's lawyer, Sorrell Trope, expresses a willingness to exchange some of what she is looking for, provided such exchanges can be done privately and confidentially; i.e., outside the media's gaze. And for good reason: revelations of how the Dodgers have been run under the McCourts have rarely been favorable to ownership. Remember the list of Jamie's perks? Or the whole taxes thing? Or buying the Dodgers entirely on creditRight or wrong, fair or unfair, it's indisputable that most of the information revealed about how the McCourts ran the club has been quite damaging.
So I totally understand why Frank's side, to the extent it will cooperate with Jamie's requests, wants to do so in a confidential way. After all, no one wants another of Jamie's notes about the idea to "bake" the McCourts own expenses "into the operating budget" made public. Ok, ok, I'll stop. Just saying that exposing the Dodgers' books for all to see hasn't worked out so well to this point.
And just what does Jamie want to see, anyway? Well, the list is long, and it includes:
  • everything related to the proposed collateralization of TV rights
  • everything related to anything related to TV rights, really
  • where the Fox advance money went
  • any financial machinations outside the ordinary course of Dodgers business
  • a debt/equity breakdown for the complete array of Dodgers- and McCourt-related entities
  • documents related to any deferred tax liability
  • any distributions to Frank McCourt from any of the entities
  • any plans to develop land around Dodger Stadium
  • all documents concerning matters outside the United States, "including, without limitation, matters in China and the United Kingdom."
All requests go back to January 1, 2007. I urge you to remember that, knowing the skill and savvy of the attorneys involved, it seems likely the 55-category list of requests was designed with media consumption in mind. Still, it is clear that Jamie McCourt is concerned with how the Dodgers are being run in the time between the souring of the marriage and its undated final disposition. The scope of the information she gets is one question. What she does with it is another.