SBJ/20100816/This Week's News

Banker’s gamble pays off in Rangers auction

Perhaps no one had more at risk in the outcome of the Texas Rangers bankruptcy auction earlier this month than sports investment banker and lender Sal Galatioto. Not the victorious bidders, led by Chuck Greenberg; not Mark Cuban, who shepherded the losing bid; not even the other banks nor MLB, who fought it out over more than seven months.

Galatioto on the evening of Aug. 3 blocked a last-minute deal to sell the team pre-auction to Greenberg and partner Nolan Ryan, prompting the top banks to warn they would sue him, something that could have doomed his five-year-old firm, Galatioto Sports Partners.

“They had the right to litigate and they threatened me with it,” said Galatioto, whose nine-person firm may be small but is a powerhouse adviser to sports teams and would-be owners. It brokered the pending $450 million sale of the Golden State Warriors and previously worked deals for the Chicago Cubs and Charlotte Bobcats.

Nolan Ryan (left) and Chuck Greenberg emerged
victorious after a long day of bidding for the
Texas Rangers.

The top lenders were alleging that Galatioto, as head of the second-lien lenders, did not have the right to block the sale. The bankruptcy judge allowed the auction to proceed, but not before noting that the lead lenders, if their contention were found true, could sue Galatioto and his firm. In addition, Greenberg, who before winning the bid blamed Galatioto for blocking the deal, could have sued for tortious interference.

From the time he blocked the deal to when the court the next day announced Cuban’s first bid, Galatioto received a steady stream of e-mails from his employees and from his family, wishing him well. It would not be until nearly midnight that the bidding exceeded the value of the deal he had single-handedly scuttled the day before, making for an agonizing day.

“I love taking huge risks to enrich them [and] now I understand some of them are taking credit for forcing an auction,” Galatioto said of the other lenders. “I am glad they are taking a victory lap and taking credit.”

Sal Galatioto blocked a deal to sell
the club on the night before the
scheduled auction.

Monarch, the first-lien lender holding the most debt, with more than $100 million, said in a statement to SportsBusiness Journal, “GSP’s actions in blocking the sale jeopardized more than $70 million in additional value.  … This divergent course of action reflected a simple fact: GSP’s significant Second Lien exposure compelled them to advocate for a highly risky and decidedly singular approach to resolving this case. Although it was not our choice to proceed with the auction in light of the deal the lenders struck the night before to remove risk, once the Court concluded that the auction would go forward no party worked harder than Monarch to ensure that it would succeed. ... We are obviously pleased with the outcome.”

The day before the auction, Greenberg increased his offer to $315 million of proceeds to the lenders, up from $235 million at the start of the bankruptcy process on May 24 and higher than a revised roughly $290 million offer just days earlier. Monarch’s mantra had been since the controversy erupted in January over the selection of Greenberg as the buyer that the lenders would not take less than $300 million, so at long last it appeared the hedge fund had achieved that goal.

TEXAS TALE
A timeline of events related to the bankruptcy auction of the Texas Rangers. All times listed are CT and are based on public testimony and both on-site and subsequent reporting.
Aug. 3
4:30 p.m.: Lead lenders and the buying group led by Chuck Greenberg and Nolan Ryan reach a deal to buy the Rangers that would deliver $315 million to the creditors. That’s up from both Greenberg’s offer of about $290 million four days earlier and the $235 million that lenders would have drawn from the original bankruptcy filing May 24.
5:00 p.m.: U.S. Bankruptcy Court Judge Michael Lynn receives a call at home from the top lenders’ lawyer seeking an emergency conference call.
5:10 p.m.: Lynn receives a call from Mark Cuban lawyer Clifton Jessup saying he heard a rumor that the lenders had struck a deal with the Greenberg group and would cancel the auction scheduled for the next morning.
7:10 p.m.: Conference call is held with Lynn, who is still at home, to hear about the deal. Lynn asks Sal Galatioto, who represents second-lien lenders, what his vote is, and he votes no — to the protest of first-lien lenders, who say he has no right to cast a vote. Lynn chooses to allow the auction to continue, saying that unless the lenders are unanimous, he will allow the auction to go forward, but he adds that the first-lien lenders can sue Galatioto if he is found to have violated the inter-creditor agreement.
8:00 p.m.: Cuban’s bid for the team arrives in court on deadline.
Aug. 4-5
3:00 a.m.: Galatioto’s counsel receives a communication from lead lender JPMorgan Chase’s counsel, Rochelle McCullough, saying that by blocking the proposed deal, Galatioto is in violation of the inter-creditor agreement and that if the auction results in less to the banks than the deal he scuttled, the lenders reserve their right to sue him.
9:00 a.m.: Auction is delayed, as the Greenberg/Ryan group seeks unsuccessfully to disqualify the Cuban bid.
1:48 p.m.: Court is informed that Cuban has the highest bid, worth $318 million cash. This amount is not the same as proceeds to lenders. That sum from the bid is tens of millions of dollars less than the amount Greenberg had offered the day before, leaving Galatioto on the hook.
2:28 p.m.: Asked by SportsBusiness Journal why his lawyer said in court they will appeal if they lose, Greenberg responds, “Ask Sal,” a reference to Galatioto blocking the deal.
5:43 p.m.: Greenberg tops Cuban’s bid by $2 million, at $320 million.
5:44 p.m.: Cuban immediately counters, at $335 million, but still leaving the lenders with less than the amount negotiated the night before.
9:05 p.m.: The counsel for the court-appointed chief restructuring officer calls the two bids neck and neck, sparking outrage from Greenberg’s attorney. (The Cuban bid is discounted because of an up to $13 million breakup fee that would be paid to Greenberg if he loses.)
9:32 p.m.: Cuban ups his bid to $355 million cash, but Galatioto is still under water, more than 12 hours after the auction was to start.
11:40 p.m.: Greenberg increases his bid to $365 million, the first major increase of his bid and the first sign that he is prepared to now bid significantly higher. It is at this point that proceeds to lenders top the amount that was guaranteed in the deal negotiated the day before.
12:07 a.m.: Cuban increases his bid to $390 million.
12:26 a.m.: Greenberg’s group goes to $385 million, which is higher than Cuban’s bid when factoring in the cost of the breakup fee. The final bid represents about $340 million to lenders, $25 million more than the amount they would have received the night before.
12:42 a.m.: To thunderous applause in the courtroom, Cuban’s attorney informs the court his client is bowing out and congratulates the winner, Greenberg.
— Daniel Kaplan

Galatioto believed the auction would bring in more, and he says he gave his word to Cuban there would be a contested sale.

“We gave our word to the other bidders that we would fight for an auction,” Galatioto said. “Relying on our word, they spent millions of dollars on legal and advisory fees. To cut a back-room deal to stop the auction literally minutes before it was set to begin did not meet my ethical and moral standards.”

In the early morning hours after Galatioto blocked the proposed deal, Galatioto’s counsel at Clifford Chance received a letter from JPMorgan Chase’s counsel stating, sources said, that Galatioto was in violation of the inter-creditor agreement that subordinated second-lien-holders’ rights and that the lead lenders reserved all rights to seek damages against GSP if the final sale proceeds were less than the amount Greenberg had offered to settle.

Galatioto still is likely to lose millions of dollars on the loan. Proceeds from the sale of the Rangers and the NHL Stars, which were owned by the same parent company, will almost surely not be enough to pay off all the creditors, and second-lien lenders fall last in line. Galatioto is the investment banker selling the Stars, and in court testimony he said he hoped to get around $140 million for the banks from that sale. Added to the $340 million the lenders were due to receive from the Rangers, that total comes to $480 million. The banks may sue former Rangers owner Tom Hicks and perhaps win some more, but even if they were to top out at an optimistically projected $500 million, that would be less than the $525 million owed, which with interest is an amount that now exceeds $600 million.

Still, the creditors received an extra $25 million after Galatioto’s block of the proposed deal, and Cuban was able to see an auction proceed to completion. In addition, by ensuring the auction, Galatioto said he helped resuscitate what had become a flagging belief for the finance world in baseball lending. MLB had moved aggressively to put Greenberg in as owner even when doing so angered the lenders.

“In the final analysis, despite what happened, we did have an auction, the courts worked, they worked right,” Galatioto said. “It will give people more confidence in asset values in baseball.”

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