Monday, September 24, 2007

Alex Rodriguez – he’s going to break someone’s bank -- but not the Chicago Cubs

Major League Baseball heads into the last week of the regular season staring at an interesting post-season. The four American League teams are all but set (the Boston Red Sox, Los Angeles Angels, Cleveland Indians and New York Yankees) and in the National League the New York Mets, Arizona Diamondbacks and the Chicago Cubs appear destined for the post season with the Philadelphia Phillies and the San Diego Padres vying for the wild-card spot. For long suffering Chicago Cubs fans (the Cubs last won the World Series in 1903) Sunday a New York Magazine report suggested not only should Cubs fans be look at the present, but the teams’ future may include Alex Rodriguez joining the Cubs next year.

New York Magazine is reporting Rodriguez’s agent Scott Boras has begun “secret negotiations” with one of the Cubs potential ownership groups. The (unnamed) group according to the report are talking to Boras about a ten-year $300 million contract that would include Rodriguez receiving an ownership stake in the Cubs. The report uses unnamed sources and its well worth noting it is illegal and against the rules of baseball for anyone to conduct negotiations with a player while he is under contract to another team. That isn’t to suggest the practice doesn’t take place, but in this case completion of the sale of the Cubs is still months away.

There is a strong favorite emerging in the sale of the Cubs, but a report last week in the Los Angeles Times suggested the process of selling the Cubs could move the sale of the franchise to 2008.

That would end any real possibility the sale of the Cubs, and A-Rod joining the Cubs could be tied together. That’s not to suggest it couldn’t take place but it’s likely if A-Rod is going to sign with a new organization he will do so in December. The financial implications A-Rod will have on whichever team signs him will force that team to make other roster moves to pare down their team payroll to lessen the overall financial impact A-Rod’s $30 million to $35 million annual contract would have on a teams’ payroll and how that might impact that team having to pay baseball’s luxury tax.

Sunday evening Boras tried to set the record straight on the New York Magazine report and the New York Yankees shrugged off the suggestion.

"Great players with great demand create great rumors," Boras said in a telephone interview with The Associated Press on Sunday night. "While I would enjoy having lunch with Mark Cuban and [John] Canning, at this point of the year that conversation would not include Alex Rodriguez. I have not talked to anyone."

"It's a silly story, and we don't believe it," he told's Buster Olney on Sunday evening. "However, if it was true, it would be grounds to disqualify the applicant even before he went through the process, because it would demonstrate a disregard for major league rules and procedures, and we're confident the commissioner would feel the same way."

That comments aside, Rodriguez has the option of opting out of the ten-year $252 million he signed with the Texas Rangers in 2001. Rangers’ owner Tom Hicks realized he couldn’t afford the biggest contract in team sports history and dealt Rodriguez to the New York Yankees four years ago. Boras included an opt-out clause in his client’s contract; Rodriguez has the right to inform the New York Yankees ten days after the conclusion of the 2007 World Series if he will exercise the free agency clause in his contract.

During the mid-summer classic Boras suggested not only would his client opt-out of his contract but he believed Alex Rodriguez was about to become the first professional athlete to earn more than $30 million annually. Boras the best in the business negotiated a similar opt-out clause in J.D. Drew’s previous contract with the Los Angeles Dodgers. Drew opted out and signed a five-year $70 million contract with the Boston Red Sox.

According to a published report: the language in Rodriguez's record-breaking contract signed in 2001 says that for the 2009 and 2010 seasons, A-Rod will receive $27 million plus the higher of $5 million or $1 million greater than the annual average value of the non-pitcher with the largest annual average value package. Thus, Boras explained, even if Rodriguez does the minimum and agrees to give up his free-agent rights to stay with the Yankees for the next three seasons, he would be guaranteed $32 million in each of the final two of those years. So Boras had the ultimate insider information when he recently told Los Angeles Magazine he anticipates the first-ever $30 million player coming soon.

"The way the provision operates, he either gets that or he can become a free agent after any of those seasons again," Boras told The New York Post.

And here’s where it makes even less sense Rodriguez is going to end up in the Windy City. There are only four or five franchises that could seriously consider a $30 million contract for one player. And with the year A-Rod is having is not unreasonable to assume he might be able to command as much as $35 million annually.

Remember not only would a team have to assume a multi-year contract likely in the area of five-year’s and $150 million but in all probability the resulting luxury tax – an additional 40 percent surcharge on an annual basis. A-Rod’s contract could cost a MLB franchise at least $42 million a year (taxes included), based on an annual contract in the area of $30 million. The Yankees and Mets both moving into new stadiums at the start of the 2009 season would look at signing A-Rod, as would both the Los Angeles Dodgers and Los Angeles Angels. It would be next to impossible for any other team to even consider signing A-Rod; it would be a terrible business decision for any other team to consider, including the Boston Red Sox.

There has been a great deal of speculation A-Rod could be headed for Yawkey Way and Fenway Park. The Red Sox average ticket price for the 2007 season is $47.47 (20 percent higher than their nearest competitor). Fenway has been sold out the four and a half seasons. The Red Sox might try and sign A-Rod (trade Manny Ramirez and Mike Lowell leaves the team as a free agent, could possibly make it work financially), but it would still represent a bad business decision for the Fenway Sports Group. Those sentiments aside; who ever said professional sports owners made business decisions based on prudent business moves? Given the professional (and at times personal) rivalry that exists between the Yankees and the Red Sox add the Red Sox to the mix as to where A-Rod may end up next year, as little business sense as it might make, especially when you consider how Red Sox CEO Larry Lucchino feels about the Evil Empire new palace set to open in time for the 2009 season,

But it’s the Yankees who remain the favorite to retain A-Rod next year and beyond. Whatever gap exists between the Yankees and every other MLB franchise in overall revenue will only get wider when the new Yankee Stadium opens in 2009. Some industry insiders estimate the Yankees will make an additional $50 million-$100 million annually.

Asked whether the new Yankee Stadium could force Boston’s ownership to forgo improvements at Fenway in favor of a new ballpark, Lucchino told The Boston Globe, "A new ballpark is not in the cards. But the new behemoth Yankee Stadium in 2009 does militate in favor of us doing everything possible to make Fenway Park a bit bigger, better, and more revenue-producing in the near future."

What about the Cubs – should the Waveland Avenue gang be added to the mix? According to a weekend ESPN report Chicago-based private-equity dealer John Canning Jr. is the strong favorite to gain control of the Cubs. It's not just that he's put together a group of local establishment tycoons that readily can amass the $1 billion it might take to buy the franchise, Wrigley Field and 25 percent of Comcast SportsNet Chicago from the Tribune Company.

The ESPN report suggests: Canning is hard-wired into the establishment of Major League Baseball, which must approve new ownership. The chairman of Madison Dearborn Partners is a friend and business associate of Commissioner Bud Selig. He owned a piece of the Milwaukee Brewers when the Seligs ran the team and still has an 11-percent stake under the new majority owner, Mark Attanasio.

Another member of the group, Andrew McKenna, also has connections. Now chairman of McDonald's Corp., he was chairman of the Cubs in the early 1980s.

What's more, Allen and Company, the investment banking firm that represented Selig's ownership group in selling the Brewers, is representing Canning's group now. Its partner on the case is Steve Greenberg, the former deputy commissioner of MLB.

Canning is the very model of the kind of owner Selig has sought to install when teams change hands, particularly baseball's flagship franchises. The commissioner wants no renegades who will break ranks on labor matters or break the bank on player salaries. (The damage might already have been done in the case of the latter, with the Cubs' $100 million payroll.)

The Los Angeles Times on September 15, 2007 reported the sale of the Tribune Company (the owners of the Los Angeles Times, The Chicago Tribune, the Chicago Cubs and other media related properties) the sale which many industry observers would include Wrigley Field (the Cubs home stadium) and the Tribune's 25% share of Comcast SportsNet, a regional cable TV network could instead be sold in parts.

Sam Zell agreement to buy the Tribune Company would allow him to sell each part of the company as separate entities, but that wouldn’t make any sense in terms of maximizing what the Cubs can be sold for.

John Henry, Tom Werner and Lucchino paid $700 million for the Red Sox and an 80 percent stake in the New England Sports Network in 2001. Henry had been the owner of the Florida Marlins; Werner had owned a stake in the San Diego Padres and Lucchino had been president of the Padres. The three men where baseball people.

The Times last week reached the same conclusion ESPN did over the weekend -- John Canning will be the next Cubs owner when the dust clears. The report also pointed out Henry, Werner and Lucchino’s bid wasn’t the biggest bid for the Red Sox six years ago. Their $700 million bid was topped by Charles Dolan’s $790 million bid for the Red Sox. Most industry observers believe when the Red Sox where sold Major League Baseball commissioner Bud Selig influenced the process – ensuring the Red Sox would be sold to baseball people. Selig claims those ‘rules of the game’ will not be enforced with the sale of the Cubs, and that Canning doesn’t have any edge as to who will next own the Cubs.

"None of that is true," Selig told the Los Angeles Times. "We would take a look at any bid. Nobody will get faster approval than any other guy."

"In the Boston situation, the people were in baseball and they were highly regarded," he said. "Did [that] play a primary role? No. But it's helpful when you know somebody."

But the sale of the Tribune Company to Zell that includes $12 billion in debt is far more complicated than the sale of the Red Sox was.

"Notwithstanding Major League Baseball's desire to be in business with John Canning," a person close to the transaction said in the Los Angeles Times report, "he's got to pay what the asset is worth."

"There are buyers who would like to pick this asset off while we're doing the larger transaction," a Tribune source said. "But we don't have a gun to our head."

"It's a great time to own the asset," a person close to the transaction said. "But that doesn't mean we should let someone else do five or 10 things to the asset that we could do to maximize its value."

Assuming both ESPN and The Los Angeles Times are correct in reporting John Canning Jr. is the definitive favorite to buy the Cubs the New York Magazine report makes no sense whatsoever.

The New York Magazine report doesn’t point to Canning being in the drivers seat when it comes to buying the Cubs but it doesn’t report (as do both ESPN and The Los Angeles Times) Mark Cuban has little if any chance to buy the Cubs. The style of contract the New York Magazine report believes could happen ($10-year, $30 million annually, $300 million and an ownership stake in the Cubs) fits Cuban’s ownership style. Like Cuban it’s innovative and practical – it makes sense, but Cuban isn’t going to buy the Cubs.

Canning knows the rules of the MLB ownership game and how they’re played. He likely has Selig’s support because in large part because Selig knows Canning won’t rock the boat and will be a good MLB team owner. Good owners who play by the rules aren’t negotiating contracts with Scott Boras that are in direct violation of MLB ownership rules – one of the most basic principals of the ownership game. If Canning is indeed the favorite – what incentive would he have to risk his favorite ownership status by secretly negotiating an agreement for Alex Rodriguez with Scott Boras? Sometimes one plus one does equal two.

And if Boras Sunday night denial wasn’t enough to suggest the New York Magazine report didn’t have a great deal of creditability than the MLB rule that prohibits a player from having part ownership of a team or a team negotiating for future ownership with a player (as part of a contract) should put the New York Magazine report to bed – but that said it won’t stop the speculation as to where Alex Rodriguez will be playing baseball next year.

For SportsBusinessNews this is Howard Bloom. Sources cited and used in this Insider Report: and The Los Angeles Times

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