Delays keeping Rangers from adopting long-term strategy
Published June 7, 2010
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.