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  • How franchise sales will fare in challenging credit climate

    Recent announcements about sales of the Chicago Cubs and San Diego Padres indicate that, despite a deep recession, opportunities will arise to purchase professional sports teams in 2009. Finding the equity and debt financing to complete these deals will be challenging, but the right combination of motivated sellers, favorable prices and creative buyers should lead to completed deals in the coming year. Here’s how that can happen.

    First, what would prompt a team owner to sell in the current business climate? Most likely a financial meltdown, whether it be the trucking business of Jerry Moyes of the Phoenix Coyotes or the media empire of the Tribune Co., although death (Georgia Frontiere, St. Louis Rams), divorce (John Moores, San Diego Padres) and tax considerations (Wayne Huizenga, Miami Dolphins) are other reasons. This type of seller will be highly motivated to sell and may help structure favorable purchase terms.

    Sale prices should be reasonable, but unlikely to be significantly reduced for healthy franchises if the agreed-to sale valuations for the Cubs’ properties ($900 million) and Pittsburgh Steelers ($800 million) are any indicator. Distressed properties such as the Coyotes (reported $45 million operating loss) will be different, with bankruptcy proceedings further complicating matters.

    Assuming a motivated seller at a reasonable price, a prospective owner will still have to be creative in this environment. On the equity side, the lead owner will need to be willing to commit substantial equity personally unless the seller is willing to take back a note, as with Bill Davidson’s sale of the Tampa Bay Lightning to Len Barrie and Oren Koules.

    The challenge will be getting minority partners to sign on. Typically, minority partners have put up substantial capital for very little in return other than good seats and bragging rights. Majority owners should be prepared to offer more in the way of cross-promotion of investors’ businesses, regular partners meetings and greater access to financial and other information on the team, inside access to players and coaches, special events and the like. Voting rights usually aren’t part of the equation as minority owners are typically busy with other ventures.

    I don’t believe that private equity firms or corporate investors will be the answer. While the purchase of the St. Louis Blues in 2006 included a significant private equity component and media companies such as Time Warner, Fox and Tribune previously invested to buy content, the private equity strategy to grow asset value and sell quickly runs counter to the longer-term appreciation model of sports teams, and strategic corporate buyers have virtually all sold their teams in recent years.

    My advice to the prospective owner: Unless seller financing is an option due to a distressed sale, stretch to put up as much as possible personally, then offer more benefits to local, deep-pocketed minority investors to lure their precious capital into the deal.

    No doubt the biggest challenge for a team buyer in 2009 will be obtaining sufficient debt financing on reasonable terms. Neither the NFL nor MLB leaguewide credit facilities were renewed, at least temporarily removing attractive debt that buyers had used, although in recent weeks the NBA renewed its $1.96 billion leaguewide loan pool. Many sports lending institutions are not currently lending. Structured capital markets transactions are currently unavailable for the most part.

    As government capital infusions and lending mandates increase liquidity at financial institutions, debt financing is becoming available. Initially, lenders will be leery of high-profile sports financings, fearing adverse publicity when so many other types of borrowers are failing to get loans. From a credit perspective, however, sports teams should be more attractive to lenders than many other types of industries this year. The Cubs’ and Steelers’ sales prices are both based on very healthy valuations. National broadcast contracts and collective-bargaining agreements are in place at all four leagues beyond 2009. Fan passion and demographics for sponsors and advertisers remain high. Unlike professional golf (financial institutions) and NASCAR (automobile industry), none of the four big leagues have too large a concentration of sponsors in any one industry.

    Leagues and owners have an enormous incentive to assist lenders in collecting loans to preserve franchise values. While sales of tickets, sponsorships and advertising will dip for a period of time, fundamentals should remain strong.

    The Ricketts family has pursued investors in its
    $900 million purchase of the Cubs and Wrigley
    Field using a debtlike form of preferred equity.

    However, buyers should expect less debt at a higher cost. Lenders will have stricter standards than in the past. The relative strength of leagues, teams and markets will be an issue. Teams will need to demonstrate strong cash flow and buyers will need to provide significant financial support. Debt-to-equity ratio as well as loan size will be reduced and financial covenants will be tightly crafted, necessitating more equity than in the past. Pricing and fees will be higher.

    How to fill the gap if there is a shortfall? I would advise using mezzanine debt (unsecured, subordinated debt at higher interest rates) or preferred equity at the level between the senior secured debt and the owner’s common equity. Be prepared to offer a paid-in-kind return added to the principal or preferred investment and repaid on sale or refinancing rather than current payment, as leagues and senior lenders will be opposed to additional demand on cash flow.

    This additional capital has not been common in sports financing deals because of strict debt limits at the leagues, the availability of senior debt and the fact that it reduces the ultimate return of the owners, but it may be needed in the current environment. Care will be needed in structuring such capital given league restrictions on holding company and enterprise debt, but there is precedent for its use. The Ricketts family is pursuing investors for a debtlike form of preferred equity in the Cubs.

    Potential owners can assemble sufficient equity and debt capital to purchase sports teams in 2009 if they employ some or all of the approaches described above. A conservative transaction structure with more total equity including more minority investor benefits, a smaller, more expensive senior debt component and perhaps a mezzanine debt or preferred-equity piece will be the ticket in 2009.

    Lyman G. Bullard Jr. ( is a partner at Choate, Hall & Stewart LLP in Boston, chairman and governor of the Portland Pirates of the American Hockey League and immediate past chairman of the executive committee of the AHL.

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  • Readers link NASCAR ratings to product on track, lack of time

    The following letters are in response to the story “NASCAR ratings take a hit” in the May 11-17, 2009, issue of SportsBusiness Journal.

    I have a group of friends that gather every Sunday to watch NASCAR, and when football season starts it is NASCAR on one TV and the Cowboys/NFL on the other.

    It’s unanimous in our group that the Car of Tomorrow’s showing last year was brutal. The racing was boring. For the first time, we quit watching towards the end of last season.

    Another reason is NASCAR became the NFL (no fun league). They stopped letting the personalities be expressed on TV. NASCAR fans love it when a driver of their’s is wronged, he gets out of his car and confronts the instigator. They started slapping fines and putting guys on probation and the storylines stopped. They were killing their own sport with their iron fists.

    Having said that, the racing seems to be better this year. The COT still has some races lacking action, but it has improved. But a lot needs to be done to make the races worth watching for 3-4 hours.

    NASCAR’s admission that they wanted the personalities back is encouraging. But I don’t know if the damage they have done previous can be undone.

    Mark Berryman
    Hereford, Texas

    As far as I’m concerned, the decline in ratings is attributable to two things. The [Car of Tomorrow] and the France family’s constant micromanaging of the Nascar rules.

    Two readers cite lack of excitement
    on the track for NASCAR’s ratings.

    The COT has brought about BORING races. Look at the number of “Green, White, Checker” finishes we had last year! And Green, White, Checker is an idiotic concept in the first place. You watch 43 cars run around the track single file for 331 laps and then see three laps of racing. Week after week after week. Whichever car takes the lead in a race, just drives away from the rest of the field, every race. Too many laps run under caution. They throw a yellow flag for debris on the track and then proceed to run eight or nine laps under caution. Why? The top 35 rule stinks, too. Nascar has micromanaged itself into mediocrity.

    I live 20 minutes away from Texas Motor Speedway and we have been PSL season-ticket holders since the track opened in 1997. We have four prime seats on the start/finish line and we haven’t gone to a single Nascar race in the last 12 months. They are BORING and not worth the effort to attend. There is  an IRL race coming up in three weeks and we will definitely go to that, because they actually race. I no longer have any interest in Cup or Nationwide races, they have lost us as fans, both in person and on TV.

    In short, ratings have declined because the product has declined. I am not alone in this thinking.

    Chuck Kyle
    Lewisville, Texas

    The reason I see is the last few weeks I turn to the race and Fox sports has a baseball game running over. I am not a baseball fan and find it quite irritating that Fox considers hundreds of baseball games they air more important than the just a few races they air. I go to my XM and tune it in and usually start something and am satisfied with listening in. That way I don’t have to listen to those big egos, either, they get old real quick. (Especially DW.)

    Philip Young
    La Marque, Texas

    After reading the “NASCAR ratings take hit” article, I wanted to comment on something.

    I guess you could say I am NASCAR’S target demo. I am Caucasian, mid-40s, six-figure income, college graduate, married with two children in the suburbs. I go to 1-2 races a year. So don’t I watch NASCAR on Sundays?

    It’s not from lack of interest in the sport, nor lack of story lines or even which network is carrying the race. I can only speak for myself, but the weekends are a busy time for us “NASCAR Dads.” We simply have other family obligations on Sunday afternoons.

    I simply can’t devote three hours on a Sunday afternoon to sit on the couch. My wife would kill me! Besides I want to spend time with my family. I try and catch the end of the race or can just watch the highlights later on in the week.

    I could TiVo it and watch it later, I realize that. But since there is so much other NASCAR programming (weekly shows, “SportsCenter,” etc. …) I can just watch those shows instead of the entire races. If I knew that the only place I could get the race results was by actually watching the race, then I might make sure I don’t miss it. That will never happen, there’s too much money involved for the networks.

    As far as the sponsor commercials, unless the message is funny, I really don’t remember the commercial. UPS’s “Race The Truck,” Kasey Kahne’s Allstate, Food Lion’s racing in the aisles, and Carl Edwards’ AFLAC spots are ones I remember. I want to be entertained, not sold! Sponsors who run the “standard” commercials, we simply just leave the room for a few minutes and come back when the race comes back on.

    Micah Fuller
    Huntersville, N.C.

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