Expect the San Francisco 49ers to win Tuesday’s referendum in Santa Clara, Calif., as voters decide the fate of a $937 million stadium project. The deal for a 68,500-seat stadium to be built by 2014 is far from done, though, because of the significant financial responsibility of the 49ers and the league. The total public contribution is $114 million, with the 49ers, NFL and a stadium authority providing nearly $825 million. While the 49ers have so far done everything right, and Northern California has an attractive corporate base, few details have emerged on how the team can raise such funds even in an improving economic market. Any way you look at it, that’s a lot to be on the hook for.
President Obama proved again that he can more than hold his own talking hoops when he sat down recently with TNT’s Marv Albert. But he dropped the ball when he called for cheaper tickets. The NBA has been one of the more progressive leagues in cutting prices, making at least 500 tickets under $10 available for each game and offering countless promos. We hope the NBA respectfully needled the White House, perhaps suggesting the president study ticket pricing as much as his ESPN game highlights.
Combine ESPN’s all-inclusive programming strategy with the country’s ever-changing demographics, and it’s virtually certain that this year’s FIFA World Cup will set viewership records for ESPN. The network set the bar high when John Skipper predicted a whopping 50 percent ratings jump. That kind of bluster has led to a number of cynics who seem to be actively rooting for low ratings almost as much as a U.S. victory. But with ESPN promoting and over-promoting the tourney, it’s hard to see a scenario where Skipper’s bullish expectations aren’t met.
It should surprise no one that as franchises in the sports industry have exploded in value and become more fully integrated into the corporate world, they would increasingly seek the protections and flexibility offered by the U.S. legal system. Accordingly, last year witnessed the declaration of Chapter 11 bankruptcy of the Chicago Cubs as well as the Phoenix Coyotes. Two weeks ago, the Texas Rangers filed for Chapter 11 bankruptcy protection.
Although the Rangers have been experiencing cash flow problems, the franchise — one game out of first place in the AL West as of June 1 — is projected to run an operating profit in 2010. The parent company, Hicks Sports Group, owns the Rangers, the NHL’s Dallas Stars and 50 percent of American Airlines Center.
Tom Hicks has put the Rangers, Stars and his co-owned Liverpool soccer team in the English Premier League up for sale.
In March 2009, HSG defaulted on $525 million of secured long-term debt obligations. Of this hefty amount owed to some 40 creditors, the Rangers directly held only $75 million of debt. The creditors, in turn, held liens on the team for the latter sum.
In January of this year, HSG reached a deal with a group of investors led by sports attorney Chuck Greenberg and Nolan Ryan, current president of the Rangers, to sell the team and adjacent real estate for $575 million. The sale of the team to the Greenberg group cannot be completed until the debt is paid and the liens are lifted.
HSG’s creditors rejected this agreement, claiming that there were higher bids for the team and that ultimately their share should be at least $30 million higher than the $270 million they were projected to receive. The Rangers’ bankruptcy filing of May 24 was designed to get the team out from under the liens and accelerate the consummation of the sale.
Many of these creditors were not the original lenders to HSG. As HSG’s financial problems became manifest during the summer of 2008, the value of its debt began to decline and much of it was sold off to hedge funds that invest in bad debt, prominent among them Monarch Alternative Capital. These funds buy debt at a significant discount and then seek to recover as close to face value as possible. They neither have nor seek a long-term relationship to the sports leagues; they seek a short-run monetary return on their investment.
In the May 24 filing, the Rangers proposed a prepackaged bankruptcy that stipulated that the Greenberg group would buy the team and called for an expedited process with a final court hearing within 45 days. The creditors counterfiled, again calling for a new open bidding process to determine the sale price for the team.
The prepackaged plan generally requires that if there are “impaired creditors,” the lenders have to vote to approve the plan. There are technical elements that appear to qualify some of the creditors as impaired and, therefore, would require a vote of the lenders.
In court on May 25-26, the bankruptcy judge, D. Michael Lynn, heard arguments from both sides and also listened to an unusual bidding war between MLB and the creditors, each seeking to loan the team money until the date of the ultimate franchise sale. While MLB won the right to make the loan, it did so on terms proposed by the creditors, including a provision that reference to the Greenberg group as the buyers be deleted from the loan terms.
Eventually, it appears that the key issue — who will buy the team and at what price — will be determined by the judge. The judge first must rule on whether or not the bidding for the team will be reopened. If it is not, then it would appear that the Greenberg bid will hold. If it is reopened and there appears to be a higher bid than the Greenberg group’s offer, then the true present value of the bid and the strength of its capitalization must be assessed. If the bid is superior financially, MLB would then have to vet and approve any new ownership group.
Based upon the bankruptcy court decision in the recent Phoenix Coyotes’ case, which showed full deference to the NHL’s internal rules; the general practice for bankruptcy courts to choose the course of action that is least disruptive to the business; and comments made by Lynn in this case, there is little doubt that MLB’s bylaws will be respected.
The agreed-upon sale price for the team and associated real estate is above the 2.5 to 3 times revenue multiple for MLB teams that has applied in recent franchise sales. It is a solid offer and suggests no favoritism or foul play. Rather, it was the product of an open bidding process that lasted nine months and resulted in three final bids toward the end of 2009. The Rangers selected the best bid.
Given all this, it is both peculiar and unfortunate that the secured creditors are holding up the team’s sale. The Rangers now will participate in this week’s amateur draft and likely enter the July 2 opening of the period to sign Latin American players without a new ownership group and without a strategy in place for continuing to build the team.
There is another hearing set for June 15 and a confirmation hearing on July 9. One hopes that there will be a final decision and sale by mid-July so that the Rangers can make the appropriate player moves before the July 31 trade deadline and the franchise will be able to exploit its current on-field success with the unfettered ability to implement a solid business model.
Andrew Zimbalist (email@example.com) is the Robert A. Woods Professor of Economics at Smith College. His new book, “Circling the Bases: Essays on the Future of the Sports Business,” will be published this fall.
Whenever a global sporting event like the World Cup is on tap, speculation rages regarding its impact on the host nation. The reference is always to “legacy” when it comes to the value these mega events will leave behind. This has particularly been the case with the FIFA World Cup being held on the African continent for the first time. The focus of such discussion is traditionally economic, but in recent years that has tilted slightly toward the social and psychic impact, and so it should be.
Frankly, the true economic impact of any sporting event is difficult to pin down. Assigning a measure to social and psychic impact is admittedly even more difficult. However, new positive views of global regions are difficult to acquire any other way than by the hosting of mega sporting events.
On the economic impact side the projected number of attendees is a key variable in determining the impact of an event. Three years ago the accounting firm Grant Thompson developed projections calling for 483,000 visitors to attend South Africa’s event. Last month, due to a combination of the global economic downturn and increased concerns regarding crime and security in the region, the estimates were reduced to 373,000. There was also a decrease in the projection of the number of visitors from African countries outside of South Africa. That number is a strikingly low 11,300.
This perspective on the size of the live gate is important. As is typically the case in a global sporting event, most of the first time “visits” will be via the images delivered in homes by event broadcast partners not by visitors actually setting foot on the host’s soil. So, the impact of increased tourism related to the event comes further out in time, if at all.
The theme that I hear most consistently from organizers is the desire to show that South Africans — “Africans” — can deliver a successful logistically complex event. Think of the universal raves about the opening ceremonies presented by the Chinese in Beijing in 2008. There is a degree of Doug Williams as the first black quarterback winning the Super Bowl and the MVP award. Not just exploding the myth that it can’t be done, but completely blowing it out of the water and ending a stereotype. This event “coming out party” has been seen with the Olympics in Tokyo in 1964, the Mexico City Olympics in 1968 and the Seoul Olympics in 1988. All three used the Games to display how advanced their countries had become. This time a continent can leverage a mega event.
In addition to realism on visitors, there needs to be a similar stepping back on the excessive predictions of physical infrastructure that will be left behind. The real numbers never match the uninformed hype. Some legacies, like the swimming pools in Munich, Montreal, Los Angeles and Seoul, and Olympic Villages turned into housing in Barcelona and student housing in Atlanta, stand the test of time. But too often venues, like the cycling velodrome in Los Angeles, are no longer with us or remain like the Bird’s Nest in Beijing, as potential white elephants. In South Africa there is a new train from the airport in Johannesburg into the city. There is a new airport in Durban. These World Cup-related projects are likely to have a sustained positive impact. But it is equally as likely that some of the stadiums will be underutilized.
Hosting a global event is an expensive path to social and psychic impact. Some estimates have the cost of building the South African World Cup facilities alone at $5 billion. But isn’t that a part of what governmental leadership should do? To the extent it can be afforded, the social and psychic are a more realistic return than the mythical economic investment numbers we have come to expect. Organizers should certainly seek needed infrastructure projects and plan long-term for whatever surplus a mega event may leave behind, but they shouldn’t count on it.
One of the most lasting legacies of any mega sporting event has been the LA 84 Foundation in Los Angeles. A portion of the more than $200 million surplus from the 1984 Olympics was used to endow the funding of youth sports in the region. It is still doing so three decades later. Those surplus days may be gone forever. Both FIFA and the International Olympic Committee now make it nearly impossible for local organizing committees to take in that amount. In the last World Cup in Germany, FIFA took in a profit of $1.8 billion.
The lessons we learn from South Africa will help us to better understand what we should anticipate for the next World Cup and Olympics in Brazil and South America. There are certainly the basic lessons about how best to sell tickets and understanding that in some economies over-the-counter sales will still be preferable to Internet sales. The Internet was an initial blunder, but local sales increased when tickets were made available via the old fashioned method. Also, to understand that even at $18, the tickets may still be too expensive for the average person in an African or, looking forward, South American economy.
What is still missing from the pantheon of scheduled events? The Olympic Games hosted in Africa. South America is finally getting the Games in Rio in 2016. If all goes well, the IOC should make the move a high priority, and all should have proper perspective on the legacy hosting the event will leave going forward.
Kenneth L. Shropshire (firstname.lastname@example.org) is the David W. Hauck Professor at the Wharton School, professor of Africana Studies and faculty director, Wharton Sports Business Initiative, at the University of Pennsylvania.