SBJ/April 2-8, 2012/Franchises

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  • Back in Blue

    Even Stan Kasten, presumptive president and chief executive of the Los Angeles Dodgers, was trying to come to grips with the mammoth scope of the $2.15 billion agreement to buy the historic team from Frank McCourt.

    “Given the very recent and significant escalation in franchise prices, I’m very glad this is the last sports team I’m ever going to buy,” Kasten quipped.

    Developing the land surrounding Dodger Stadium has potential to boost revenue for the new team owners.
    Photo by: NEWSCOM
    Within Kasten’s offhand comment, however, lies the fundamental question of the landmark deal he and the rest of Guggenheim Baseball Management struck to buy the Dodgers: How does this acquisition make any sort of financial sense?

    The deal’s size is nearly twice the prior record for a North American sports team sale, Stephen Ross’ $1.1 billion purchase of the Miami Dolphins in 2009, and nearly three times the $845 million the Ricketts family paid for the Chicago Cubs the same year. Guggenheim, as part of the overall deal, committed $150 million to enter into a joint venture with McCourt for the Dodger Stadium parking lots and related Chavez Ravine land.

    A vital part of the Dodgers’ financial future is the club’s cable TV rights, which will hit the open market beginning with the 2014 season. A fierce battle involving Fox Sports Net, Time Warner and probably other major suitors is likely to push the rights fees beyond $4 billion covering a 20-year period, according to estimates from several media executives. The coming negotiations could also yield a new regional sports network in which the Dodgers would hold equity. In either scenario, the Dodgers and the Los Angeles media market that is the country’s second largest are the focal point of a historic escalation in local rights fees now enveloping much of baseball.

    “The buyers here now sit in absolutely ideal position of leverage with regard to the media rights,” said Chuck Greenberg, former Texas Rangers managing partner and current chairman and managing partner of the Class A Myrtle Beach (S.C.) Pelicans.

    Other significant opportunities await the team for boosting revenue in and around 50-year-old Dodger Stadium, which underwent a series of renovations under McCourt but probably needs at least $200 million in additional work, according to several executives that were involved in the bidding for the club. The surrounding 250 acres, located less than three miles from downtown Los Angeles, also holds vast potential given the continued growth of the center city area. But with difficult access points, the property is no guaranteed goldmine.

    “I’ve always been skeptical of the idea of developing retail and entertainment in the parking lots. It just doesn’t seem like the right location,” said sports architect and Los Angeles-area resident Don Meis. “It isn’t easily visible or accessed and would seem to be a challenging location on non-game days.”

    Given the unprecedented size and complexity of the deal, it may take years, maybe decades, before it is fully realized and understood. “It’s going to be a long time before anyone really knows if they paid the right price, overpaid, or got a great deal,” said Steve Tisch, New York Giants co-owner. “It’s a unique situation and a very iconic brand. … But it’s a big number.”

    Added Chicago-based sports consultant Marc Ganis, “This number is simply too high for today’s industry, today’s situation, even in the most optimistic of circumstances. Maybe in five or 10 years it begins to make more sense along those lines. There was a huge deal premium involved here, one that now presents the need for an extraordinary business plan that is executed flawlessly.”

    The Dodgers generated about $240 million in revenue last year, down sharply from $265 million in 2010 and $286 million in 2009. Team sales often occur at a multiple of about three times annual revenue, though there often are variations depending on particular circumstances. The Dodgers, however, just sold at a multiple of more than eight times annual revenue.

    Magic Johnson may hold a smaller equity stake, but he gives the Dodgers an outgoing brand advocate.
    Photo by: GETTY IMAGES
    Kasten and Guggenheim, for their part, are trying to view the deal beyond strictly return-on-investment terms. Joining Kasten in the deal are Mark Walter, chief executive of Chicago financial services firm Guggenheim Partners; basketball hall of famer and businessman Magic Johnson; Mandalay Entertainment Group Chairman Peter Guber; and a group of other investors. Walter will be the chairman, lead owner and designated control partner for the Dodgers, while Johnson, Kasten, and the other investors will carry far smaller equity stakes.

    “Our interest here, clearly, is to transcend ROI,” Kasten said. “In a certain sense, the purchase price only matters if you’re looking to flip this, and with us, this is something we’re looking to hold on to literally for generations. This is such a unique property and a Tiffany brand.”

    That mind-set governed the frenetic 48 hours last week in which the Guggenheim group pre-empted an auction set to be held Wednesday in New York with the final three bidding groups, which also included hedge fund billionaire Steven Cohen and Kroenke Sports Enterprises owner Stan Kroenke. The last Guggenheim bid submitted to McCourt before the auction was so much higher than the rival offers that McCourt essentially pulled the team off the block at that point. In fact, the roughly $650 million gap between Guggenheim’s bid and those from Cohen and Kroenke was about equal to what Jim Crane paid less than five months ago for the Houston Astros, a team with a seemingly bright financial future of its own based on a coming regional sports network and a 12-year-old ballpark in fine shape.

    “We have now seen true free agency in the pursuit of a major franchise,” said baseball agent Scott Boras, referencing in part some other team deals where MLB exerted more control over the sales process.

    “Way back when, when the [Boston] Red Sox were sold, they necessarily didn’t go to the highest bidder. When the Oakland A’s were sold, they didn’t necessarily go to the highest bidder. We are seeing the evaluation of a franchise in the current market, and I think it is going to be reflected in franchise values to come,” Boras said.

    Said Stan Kasten, “The big thing right away is getting the Dodgers operating at maximum productivity levels.”
    Photo by: GETTY IMAGES
    Kasten’s initial step toward rebuilding the Dodgers and boosting revenue to make the purchase price more economically justifiable will be re-establishing the team’s core business. Attendance, as recently as 2009 the best in MLB, plummeted nearly 18 percent last season to its lowest level in 11 years. Sponsorship, merchandise sales, parking, concessions and other team-specific revenue all suffered as well, as legions of fans, even those holding paid tickets, aggressively avoided Dodger Stadium amid McCourt’s high-profile divorce and bankruptcy woes.

    In rebuilding, Kasten will lean significantly on his many years of experience running the Atlanta Braves, Hawks and Thrashers, and then the Washington Nationals. The Braves and Nationals are held in high regard around baseball and still have front office staffs largely built by Kasten during his tenures there.

    “The big thing right away is getting the Dodgers operating at maximum productivity levels,” Kasten said. “The primary Dodger business remains the center of everything. Once those core areas are more fully developed, we can then start to think about other brand extensions. And there’s obviously a world of opportunities for us there.”

    In developing those brand extensions, the Red Sox may be an important influence on the Guggenheim group. Fenway Sports Group and Guggenheim Baseball Management are structured somewhat similarly, with Walter to serve for the Dodgers in a John Henry-type role leading the organization as a lower-profile numbers guy, Johnson comparable to Tom Werner as a more outgoing brand advocate, and Kasten running day-to-day operations and holding some equity as Larry Lucchino does in Boston. Though the equity split between Johnson and Walter is believed to be far different from what exists between Henry and Werner, Fenway Sports Group’s powerful entries into soccer, auto racing, events, sponsorship sales and other non-baseball activities present a notable example for what could occur in Los Angeles.

    “Right now, it’s very much one step at a time, and so much of the energy to date has been focused on simply the deal,” said Irwin Raij, partner with Foley & Lardner, which represented Guggenheim and also was involved with the Cubs and Rangers sales. “But over time, I think you’ll see the group think very creatively about what’s best for the brand.”

    Staff writers Daniel Kaplan, Liz Mullen and Don Muret contributed to this report.


    HOW THE DODGERS DEAL COMPARES
    Most recent MLB deals
    Team (year) Cost Principal buyer(s) Seller
    Houston Astros (2011) $615 million Jim Crane Drayton McLane
    Texas Rangers (2010) $593 million Chuck Greenberg and Nolan Ryan Tom Hicks (at auction)
    Chicago Cubs (2009) $845 million Ricketts family The Tribune Co.
    Atlanta Braves (2007) $461 million Liberty Media Corp. Time Warner Inc.
    Washington Nationals (2006) $450 million Ted Lerner Major League Baseball
    Most expensive deals*
    Team (year) Cost Principal buyer(s) Seller
    Miami Dolphins (2009) $1.1
    billion
    Stephen Ross Wayne Huizenga
    Chicago Cubs (2009) $845 million Ricketts family The Tribune Co.
    Washington Redskins (1999) $800 million Daniel Snyder Estate of Jack Kent Cooke
    Boston Red Sox (2002) $700 million John Henry JRY Trust
    New York Jets (2000) $635 million Robert Wood Johnson Estate of Leon Hess
    * Among U.S.-based franchises
    Note: Deals listed include different additional assets within each sale, such as stadiums or television rights.
    Compiled by David Broughton
    Source: SportsBusiness Journal archives

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  • Liverpool FC to play in Fenway exhibition

    Fenway Sports Management has completed a long-anticipated deal to bring sister operation and English Premier League club Liverpool FC to Fenway Park to play a July 25 exhibition against Serie A club AS Roma.

    Other games were slated to be announced as part of a larger North American tour arranged and managed by FSM. An American tour for Liverpool, including an obvious Boston stop, has been a key priority for FSM since the company’s high-profile acquisition of the team in 2010.

    The North American tour includes a presenting sponsorship deal with Standard Chartered Bank, Liverpool’s kit sponsor.
    FSM was aided by CAA Sports in constructing the North American tour. Liverpool will use Boston as its home base during the tour and train at Harvard University.

    Boston Red Sox minority owner Thomas DiBenedetto and Celtics minority owner James Pallotta purchased AS Roma last year.

    — Eric Fisher

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  • Sabres stay focused on goals, despite bumps

    The Buffalo Sabres will win the Stanley Cup — sooner or later. That’s according to President Ted Black, who likes the path the team is on.

    That path has been a bumpy one. The season began with high-profile trades, a new name on the arena, a rash of player injuries, a seven-week period where games weren’t shown on Time Warner Cable, and the threat that the team might miss the playoffs.

    All in all, Black says things are good with the franchise.

    “I like the trajectory we’ve put in place,” he said. “I’m bullish on what we’re going to accomplish here.”

    He was referring to winning the Stanley Cup.

    When Terry Pegula took over the team in 2011, he took aim at winning the Stanley Cup.
    Photo by: ICON SMI
    On Feb. 22, 2011, when Terry Pegula took over as Sabres owner, Pegula famously said: “Starting today, the Buffalo Sabres’ reason for existence will be to win a Stanley Cup.” And if fans want to hold him to that, Black is totally fine with it. “It may not be this year or next year,” he said, “but it’s going to happen.”

    Black joined the team when Pegula took over. And if Sabres followers are waiting to hear that the team is losing money or needs to advance to a certain playoff round to make money, they shouldn’t. That message isn’t coming. He said he is aware that in previous years, many worried about the team’s financial stability.

    And while Pegula may talk about the state of the team at season’s end, he won’t talk dollars and cents.

    “We don’t need to have that conversation,” Black said. “Terry paid cash for the team. We carry no debt, and the team is being run financially as he sees fit. There’s no need for a state-of-the-team [address] to have a financial report card, and as a business practice, there’s no financial scorecard.”

    What Black and other leaders do keep an eye on are ticket sales, which he said can drive 30 percent to 40 percent of a team’s revenue.

    Without providing specifics for other financial drivers, he said TV revenue is responsible for the next big chunk.

    TV viewership was negatively affected this year when Time Warner Cable and MSG Network, which broadcasts Sabres games, were locked in a stalemate over carriage fees MSG was charging the cable giant.

    Black considered that to be this season’s biggest off-ice challenge, saying, “Those types of disputes don’t come along very often, and it caught me a little by surprise.”

    He didn’t realize MSG Network would be unavailable on Time Warner until about two weeks before it went away for 48 days on Jan. 1. During that time, Black said he would get emails from parents explaining that their kids weren’t able to watch the games.

    Viewer ratings were down for MSG broadcasts, he said, but when the team played a nationally televised game, they were up.

    As his first season with the Sabres winds down, Black is proud of selling the naming rights for HSBC Arena to First Niagara Bank, as well as the two months of work that followed to transform the arena to First Niagara Center.

    “I’m most proud because from the time we met with [First Niagara President and CEO] John Koelmel to the time we pressed the fake button that lit the lights was about 60 days,” he said. “That’s probably as quickly as anyone has ever done that. It’s a testament to how nimble both organizations are.”

    According to Black, Pegula’s lean business model allows decisions to sometimes be made over five-minute conversations. There’s no board of directors to consult.

    A year ago, Pegula was seen as a hero who promised to keep the franchise in Buffalo and build a champion. But Black said Pegula would rather remain in the background and attention should focus on the team this time of year. As such, he didn’t grant one-year anniversary and review types of interviews. So Black answered the questions.

    “Day to day, Terry is more than comfortable with me speaking on behalf of the business,” Black said.

    He also said that as injuries and losses piled up these last few months, Pegula hasn’t lost his passion, composure or resolve.

    He admits that the bar was set high for the season. Together, fans and the franchise rode a wave of enthusiasm as they entered the season. And on the ice, the team has not met expectations.

    But even if they miss the playoffs, Black said there are no plans to reduce spending or change the way they build the team.

    “Hopes were set high, and sometimes you set the bar high and you miss,” he said. “Even high jumpers get three tries.”

    David Bertola writes for Buffalo Business First, an affiliated publication.

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