Wednesday, April 04, 2007

The Sale of the Cubs, much more than the sale of a MLB franchise

The Tribune Company announced Monday that the Tribune’s board had agreed to accept a revised $34-a-share proposal from Chicago real estate magnate Sam Zell to buy out the company's public shares in a complex, $8.2 billion transaction structured around an employee stock ownership plan, or ESOP. However (and here’s the sports angle to this mega deal) to help fund the agreement, Tribune said it would sell the Chicago Cubs and its 25 percent stake in local cable channel Comcast SportsNet Chicago after the 2007 season.

It’s rare a sports franchise as iconic as the Chicago Cubs are put on the market. The last baseball franchise with as much “panache” as the Cubs being put up for sale was when John Harrington the trustee for the Yawkey Foundation placed a for sale sign on the Boston Red Sox. In 2002, the Red Sox sold for a MLB record $700 million, a price that included an 80% stake in NESN, the cable channel that airs the team's games. It’s important in understanding the value of the Red Sox; John Henry purchased the team, Fenway Park and revenue generating NESN.

Before Monday’s sale to Zell, the Tribune’s company’s assets directly related to companies baseball operation included: the Cubs, Wrigley Field, WGN, WGN Radio and a 25 percent interest in broadcast partner Comcast SportsNet Chicago. While any actual sale of the Cubs is months away, at least Tuesday confusion was the order of the day in terms of what actually would be offered along with the Cubs. A report in the Chicago Tribune suggested Zell has every intention of keeping both WGN and WGN Radio, and another report in the Tribune (the company that has been sold) notes nowhere has it been said Wrigley Field will be a part of any package that includes the Cubs.

If the Tribune company had decided to package the Cubs, Wrigley Field, WGN, WGN Radio and Comcast SportsNet Chicago as a package, those five properties packaged together could have sold for as much as $2 billion, at the very least for $1.5 billion. The Cubs sold on their own (with Wrigley Field) might sell for between $500 and $700 million.

Without Wrigley Field, the new Cubs owner would be forced to pay rent for Wrigley Field and could easily be held hostage by whoever owns Wrigley Field. As attractive as owning the Cubs maybe to a select group of people, if the new owners of the Cubs have to answer to the owners of Wrigley Field it would be nonsensical for anyone to purchase the Cubs – it would be a terrible decision.

Noted sports economist Andrew Zimbalist told The Tribune Tuesday, establishing what the Cubs can be sold for will be easier said than done.

"Unless you know where the revenue streams are and how long they last, you really can't tell what the Cubs are really worth," Zimbalist said.

Robert Caporale of Game Plan, a Boston sports investment firm, told The Los Angeles Times in November he believed, the Cubs could sell for "even more than what the Red Sox and NESN fetched." A Wall Street insider told the Los Angeles Times the Tribune company pegged the value of the Cubs at $1 billion.

Despite Caporale’s belief the Cubs could sell for more than the Red Sox did, that makes little if any sense. The $700 million John Henry’s group paid for the Red Sox included NESN. Cubs’ games are televised on WGN and the radio rights holder is WGN Radio and neither of those key media properties will be included in whatever price the Cubs are sold for.

Regardless the Tribune Company will experience an amazing return on their initial investment in the Cubs. The Tribune purchased the Cubs for $20.5 million in 1981. Its reasonable to assume the Cubs (with or without Wrigley Field) will sell for at least $500 million once the 25 percent stake in Comcast SportsNet Chicago is factored in.

One name that has often been mentioned in connection with interested groups in purchasing the Cubs includes Mark Cuban. Cuban the bombastic owner of the Dallas Mavericks Cuban, in an e-mail to the Tribune, wouldn't confirm his interest in the Cubs. "Saying something is for sale in nine months isn't the same as saying its for sale now," his e-mail said.

Cubs’ fans shouldn’t hold their breath waiting for Cuban to jump on the Cubs bandwagon. In his much read blog in early November Cuban bemoaned how he had lost out on an opportunity to buy the Pittsburgh Penguins. Cuban hasn’t shown any real interest in the Penguins since Kitchener, Ontario businessman Jim Basillie walked away from his intent to purchase the Cubs in mid-December.

After Cuban the other ‘sexy’ name being tossed about is former Chicago Bulls executive Jerry Colangelo. Born and raised in the Windy City, Colangelo moved to Phoenix in 1968 to take over the expansion Phoenix NBA franchise as the youngest general manager in professional sports, and has molded the Phoenix Suns into one of the most successful organizations -- on and off the court -- in the NBA. In addition, he brought Major League Baseball to the Valley in 1998, and was chairman of the 2001 World Champion Arizona Diamondbacks. Colangelo also was the key element in facilitating the move of the NHL’s Winnipeg Jets to the Valley of the Sun to become the Phoenix Coyotes. He is a four time NBA executive of the year, a member of the Basketball Hall of Fame and the man entrusted with the responsibility to bring men’s Olympic basketball gold back to the United States.

"I have a lot of juice left," Colangelo said in a telephone interview in late November in which he barely tempered his enthusiasm over the fact Tribune Co. hasn't put the Cubs on the market officially with The Chicago Tribune.

"No decision has been made, but would I have interest? Absolutely. It would be very attractive—if they're for sale."

"I have great respect for the Cubs' brand," Colangelo said. "It's as strong as there is."

So with the Tribune moving forward with the sale of their assets including the Cubs, how does Jerry feel about the Cubs being available?

"I've already had a few calls about that from financial people if I'd be interested," Colangelo said Monday in a telephone interview with the Tribune. "My attitude is this: This is what I anticipated, that they'd be sold after the 2007 season. So I've put this on the shelf, and I'll wait and see what will transpire."

"Now we'll revisit it," Colangelo said. "It's fresh, it's new. I'm going to be watching with interest."

But is Jerry Colangelo the right man to own the Cubs? And what about his track record in Phoenix as owner of first the Suns and than the Diamondbacks?

The Phoenix Suns were at the edge of the abyss in 1987 when Jerry Colangelo stepped up and coordinated a group of investors that purchased the club for $44.5 million on October 14, 1987. That transaction was the first of many that helped Colangelo not only stabilize the basketball organization but also transform downtown Phoenix into an active and thriving district.

In 1987 the Maricopa County (Phoenix) Attorney's Office indicted 13 people on drug-related charges, three of whom were active Suns players (James Edwards, Jay Humphries and Grant Gondrezick). These indictments were partially based on testimony from star player Walter Davis, who was given immunity. No defendants ever went to trial: two of the players went into a prosecution diversion program, while another received probation. Nevertheless, the scandal, although now perceived in many respects to be a witch-hunt, tarnished the reputation of the franchise both nationally and within the community. The scandal did provide an opening for general manager Colangelo to lead a group that bought the team from its owners for $44 million, a record at that time.

Colangelo quickly moved on a new arena for the Suns, and in April 1989 the city of Phoenix approved the concept of a new, state-of-the-art downtown arena that would house the team. The 18,422-seat America West Arena opened in June 1992 and became the first venue in the NBA to also house a full-size practice facility, an amenity now common in the league. The arena is a public-private partnership with the City of Phoenix and has played host to a wide variety of concerts, family shows and sporting events, including the 1995 NBA All-Star Game and the 2000 WNBA All-Star Game.

The key to understanding how Jerry Colangelo does business and why he’s been successful in managing the Suns and the Diamondbacks is that his actual investment (dollar figures) in the teams he served as managing director has been minimal. After putting together a group who invested $44.5 million in Colangelo’s vision for the Phoenix Suns, Colangelo put together another group of investors that secured a franchise for Phoenix on March 9, 1995, paying a record MLB $130 million expansion fee.

Colangelo mortgaged the Diamondbacks future to win the 2001 World Series. In 2000 Major League Baseball had to guarantee a bank loan to keep Colangelo’s Diamondbacks franchise afloat (a first for MLB). Ten members of the 2001 Diamondbacks agreed to restructure their contracts, including Randy Johnson, a key member of the World Series winners.

''I feel I'm helping this organization out to let Jerry have some working capital and go out and get what he needs to make this a competitive team,'' Randy Johnson, one of the deferring 10, told The New York Times. Having had to ‘rescue’ the D-Backs from financial peril, Major League Baseball was less than enamored with Colangelo’s business philopshy in May 2001.

''There are significant concerns there,'' the official told The New York Times Murray Chass at the time speaking on the condition of anonymity. ''They've spent themselves into serious economic problems. What they've done with deferring more money has only postponed the problem.''

It’s important to understand Colangelo’s history as an owner is to find investors, find success, win championships, while spending other people’s money. In May 2001, five months before the D-Backs accomplished what was once unthinkable (winning a World Series in the franchises fourth year), Colangelo made it clear to the New York Times all was fine with how he managed the business affairs of the Diamondbacks.

''Not at all,'' he said. ''People refinance their homes. Companies downsize and let people go. In our case, when the season ended last year and we took inventory, I had to weigh the fact that I had committed to make a run with a group of players I put together.''

''To keep it together, looking at our cash-flow projection, we needed to get a little more lean in our operations. We were a little fat. Part of what I thought was a viable option was spreading the payouts to the players. It lessens the cash-flow requirements each year.''

The Diamondbacks won their World Series in their fourth season; proof positive money can buy a championship. In 1969 the baseball world marveled at The Amazin’ Mets, winning the World Series in their eighth season. Jerry Colangelo’s personal investment in the Arizona Diamondbacks was less than 2 percent. Colangelo’s unique ability to raise hundreds of millions of dollars by getting people to support projects he believed in was proof positive when the D-Backs won their World Series. Colangelo sold Major League Baseball on the Phoenix market, found a group of investors, secured the additional funding for Bank One Ballpark, and then built (bought) the 2001 World Series.

Built at a cost of $349 million, and seating 48,569, the D-Backs sold 2,091,505 tickets in 2006, averaging 25,821 or 52.7 percent capacity. Winning wasn’t an issue in the teams’ inaugural 1998 season. The D-Backs won 65 games and sold 3.6 million tickets. A year later, the D-Backs won 100 games and made the playoffs. Interestingly the teams’ attendance fell to 3,013,778, a drop of nearly 600,000 but a team that won 35 more games and made the playoffs in their second season. The D-Backs 2001 World Series title attendance fell to 2,736,361. The fall in attendance while delivering a contending and competitive team had to raise a great many red flags about baseball’s future in Phoenix.

The D-Backs enjoyed a nice attendance bump after winning the 2001 World Series selling 3,198,977 tickets, averaging 39,493 or 87.7 percent in 2002. In 2003 the D-Backs sold 2,910,386 tickets, averaging 35,930 tickets or 71.4 percent capacity. The D-Backs won 98 games in 2002 and 84 games in 2003. After the 2003 season the D-Backs completed the dismantling of their 2001 World Series team by first trading Curt Schilling to the Boston Red Sox, and then traded Randy Johnson to the New York Yankees a year later for two players and $9 million. If ever a baseball franchise sent a message to their fans the good days where over it was the Arizona Diamondbacks in dealing Schilling and Johnson.

Heading into the 2007 season the Diamondbacks have rolled back their ticket prices by an astonishing 29.9 percent, one of the biggest single ticket price rollbacks in professional sports history.

Schilling shared the 2001 World Series MVP Award star with Johnson. He and Johnson also shared Sports Illustrated magazine's 2001 "Sportsmen of the Year" award. In 2002, he went 23-7 with a 3.23 ERA. Both years he finished second in the Cy Young Award voting to Johnson.

In 2004 the D-Backs first year without Schilling, the teams’ attendance fell to 2,519,560. In 2005 the D-Backs first year without Schilling and Johnson their attendance fell to 2,059,331. Delivering a World Series in the teams’ fourth season was amazing. Winning 100 games in the teams’ second season must have seemed unbelievable, but at the end of the day it’s too much success to early on. How exactly was the D-Backs management team going to follow-up their first four seasons. It was 86 years between World Series titles for the Red Sox. The Chicago Cubs haven’t won a World Series in 103 years.

Three years after winning the 2001 World Series, the bottom having fallen out of the teams’ attendance, hemorrhaging in red ink, the members of the consortium who owned the Diamondbacks in 2004 had enough of how Jerry Colangelo managed the business affairs of the D-Backs buying him out. Clearly for a team that hasn’t won a World Series in 98 years makes the arrival of Jerry Colangelo as the Cubs savior perfect timing on his part.

What about Jerry Colangelo owning the Cubs? Well, he’s put together big sports ownership deals with other people’s money, but nothing that comes close to the $500 to $700 million he would need to buy the Cubs. Finding investors with enough resources to make the Cubs work (buying the Cubs and Wrigley Field as a package) isn’t in Colangelo’s league. Its rarified air Colangelo and his group aren’t a part of. However, that hasn’t stopped Colangelo before – you know based on his history the opportunity to own the Cubs is to enticing for Colangelo to not set his sights on. In the months ahead they’ll be many more names that will be talked about in terms of buying the Cubs, but none with the ‘pedigree’ Colangelo can offer. He has a great relationship with Major League Baseball (especially Bud Selig) and Colangelo has a real passion for winning. He’ll be the ‘people’s choice’ but at the end of the day that won’t mean a great deal, because when all is said and done this deal will all be about money, how much money someone or more likely a consortium are prepared to invest in the Chicago Cubs.

For Sports Business News this is Howard Bloom. Sources cited and used in this Insider Report: The Chicago Tribune

Labels: , , , , ,