Will Dodgers' new owners be able to profit?
Apr 01, 2012 (Los Angeles Times - McClatchy-Tribune Information Services via COMTEX) --
By agreeing to pay $2.15 billion for the Los Angeles Dodgers, the ownership group led by Guggenheim Partners is betting that it can rewrite the economics of professional team ownership.
The deal's success hinges on an array of factors, including how much money can be squeezed from TV rights and whether the adjoining land could be developed with shops, homes or other projects.
Adding to the challenge is the steep purchase price. The winning offer came in more than $500 million above the next-highest bid, leading some to conclude that the Chicago-based consortium may have been too optimistic in its projections.
"Don't dismiss the hypothesis that the buyers made a mistake," said John Siegfried, an emeritus professor at Vanderbilt University who is an expert on sports economics. "It happens."
The Guggenheim-led team may view the Dodgers as a distressed asset, with significant revenue -- including hundreds of thousands of unsold tickets -- left on the table thanks to unpopular decisions by current owner Frank McCourt.
Michael Rapkoch, who has advised dozens of professional teams on team valuation, said the new owners have already taken steps to right the ship by enlisting one of the country's best baseball minds in Stan Kasten and by making former Lakers star Magic Johnson the frontman.
"It's an amazing number," Rapkoch said of the purchase price, which is five times the $421 million that McCourt paid in 2004. "But the people behind this deal are pretty astute and have made good assumptions of how much they can make."
Guggenheim, with $125 billion in assets, often looks to plow some of its money into companies that others view as damaged goods. Among its recent acquisitions are the parent company of the Hollywood Reporter and a unit of bankrupt MF Global Holdings.
The firm's chief executive, Mark Walter, put together the Dodgers deal with money from major institutional investors such as insurance and pension funds. He also has a stake, as do five other named investors including Johnson and Kasten.
Walter will control the new ownership group, Guggenheim Baseball Management. A baseball fan, he has pledged a long-term approach to ownership, saying he hopes his "daughter's granddaughters" will one day own the Dodgers.
Institutional investors, on the other hand, are fans of profits.
"This thing is going to lose money for a few years before it becomes profitable," said one of the initial bidders, who asked not to be identified because Major League Baseball demanded confidentiality. "Investors usually want returns fairly quickly."
Guggenheim, through a spokesman, declined to comment for this article.
Most analysts agree that the buyers' big payday must come from cable television. Huge deals struck in the last two years by the Angels, the Texas Rangers and the Lakers have shown that regional sports networks such as Fox's Prime Ticket can pay enormous sums for TV rights because of the growing importance of local sports.
The Dodgers' cable deal with Prime Ticket was signed in 2004 and expires next year. Signed before the huge run-up in live sports contracts, the 10-year deal, which expires in 2013, is worth $320 million; by comparison, the Angels' new deal, struck in December, is valued at $3 billion over 20 years.
Last year, Major League Baseball rejected a pact worth as much as $3 billion between the Dodgers and Fox, partly over concern that too little money would go to the team. Now the price tag is only likely to go higher. With Time Warner Cable launching its own regional sports network (it already has snared the Lakers), the Dodgers could benefit from the rivalry, with predictions of a 15- or 20-year deal worth upward of $4 billion.
Guggenheim Baseball Management could also start its own regional sports network, as the Yankees did with their YES Network, and make money selling ads. Or it could take an ownership stake in an existing network, such as Prime Ticket.
"It's a great time to be owner of sports rights in the second-largest media market in the country," said Chris Bevilacqua, a media strategist and investor who helped negotiate the Pac-12's TV rights.
Still, Bevilacqua said, there are significant risks in pinning the team's future to a long-term TV play, especially if the team becomes a part owner of the network. Live sports are the linchpin of cable television now, since people tend to watch games live rather than recording them, creating a captive audience for advertisers.
But the Internet could disrupt the pay television model, just as it did with movies and music. If Fox or Time Warner Cable buys the Dodgers rights, that risk is theirs alone. But if the Dodgers take a stake in the networks, as has been the trend, then the team will bear part of that exposure.
There's also the threat that the Federal Communications Commission or Congress could force cable operators to sell access to channels a la carte, long the dream of consumer advocates. That would undermine profits of cable TV and sports channels, which can charge upward of $3 per subscriber per month.
"If all of a sudden the cable carriers drop to 50 million subscribers from 100 million, that's a huge problem," Bevilacqua said.
Even massive TV money may not be enough to pay the bills, some say.
Chicago sports consultant Marc Ganis estimates that the Dodgers profit could increase by $100 million thanks to TV, increased ticket sales and marketing arrangements such as a potential stadium naming deal.
But to get that return, he said, the new owners would need to win the goodwill of fans, which means shelling out for top-name players.
"If you're going to play in the same sandbox as the Angels and sign people like Albert Pujols, you need to spend a lot of money," Ganis said.
When he bought the team, McCourt pledged that the Dodgers payroll would rank among the top quarter of major league squads. But the team hasn't ranked that high since 2008, and last year it was 12th out of 30 in the league.
Then there's the cost of updating 50-year-old Dodger Stadium. The fix-it list includes new concessions areas, refurbished bathrooms and better parking lot lights.
The cost of many of those improvements, which bidders have said could be between $200 million and $300 million, could be offset by increased revenue from ticket sales, concessions and perhaps swankier corporate boxes. But one bidder said that Major League Baseball was suggesting far costlier investments, such as connecting the separate bleachers area to the rest of the stadium seating.
Another way the new owners could squeeze value out of the deal is by developing the land around the stadium.
The new owners are paying $2 billion for the team and the stadium; the remaining $150 million will go to a joint venture controlling about 250 acres, including the parking lots and outlying areas.
Guggenheim Baseball Management and McCourt will each own half of the joint venture and will split profits, said a person familiar with the deal who was not authorized to speak publicly. That values the real estate around the stadium at $300 million, the person said. McCourt paid $100 million for the land (and the stadium) as part of his 2004 purchase.
That valuation could be justified if the owners develop residential projects, a shopping mall or even a football stadium on the land. But any development faces potential hurdles.
Pasadena real estate appraiser Steve Norris points out that the property has limited road access and irregular traffic, making it a tough sell for many commercial developments. The best option, he said, would be a high-end residential development with a view of the downtown skyline.
The land is now zoned for agricultural use or open space. Any development would require city approval, which probably would face community resistance because of traffic and environmental concerns. And one bidder suggested, "Frank McCourt is the last man in America who could get anything rezoned in Los Angeles."
One solution would be for Guggenheim to eventually buy out McCourt's share in the joint venture, potentially giving him another big payday.
For now, the prospective owners are still buzzing over winning the team.
The mood at the deal signing in New York on Tuesday night was "joyous for everybody," said Irwin Raij, Guggenheim's lead attorney in the negotiations. Walter had made his $2.15-billion offer, which McCourt quickly accepted, and once Major League Baseball approved the final three bidders that afternoon, the deal was as good as done.
Walter signed the paperwork around 10:30 p.m., with Johnson and Kasten looking on and Raij snapping pictures on his iPhone.
"This is the Dodgers," said Raij, who handled the Montreal Expos' move to Washington, D.C., as the Nationals. "They are one of the jewel franchises. This was a once-in-a-lifetime opportunity that couldn't be passed up."
Times staff writer Joe Flint contributed to this report.
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