Monday, April 02, 2012

Sale of the Dodgers – still the big news of the day

The NCAA Basketball Championship will be decided tonight in New Orleans. But the biggest news in the sports industry continues to be the sale of the Los Angeles Dodgers for $2 billion, a sale price that increases the value of every sports franchise. If a Major League Baseball franchise forced into bankruptcy by the mismanagement of their ownership could sell for $2 billion, then every sports franchise increased in value as a result.

The sale completed late Tuesday evening has resulted in Dodger tickets becoming a hot commodity.

"There is definitely a renewed sense of excitement with our fans, and it has really resonated (in terms of sales)," said David Siegel, Dodgers senior director of ticket sales in an ESPN Los Angeles report. "Our phones have been ringing like crazy.

"We have seen a spike across all of our tickets sales," he said.

The Dodgers led Major League Baseball in tickets sold throughout most of the 1970’s and 1980’s, often averaging more than 3 million fans annually. The surge in ticket sales – a direct result in increased consumer confidence. The Dodgers won during Frank McCourt’s ownership period, but the team lost on the field last year and were an embarrassment off the field.

"From my perspective, I think there are a lot of factors," Siegel told ESPN. "I think as a result of lowering prices across the board, adding some great season-ticket holder benefits and amenities, all coupled with our transition into a new ownership, we finally are starting to see some traction from all the work we have put into this over the past several months.

"Also, we are seeing a lot of season-ticket holders who flat-out canceled last year calling back now to see if their seats are still available." And in many cases, as Siegel told ESPN, their former seats have been available.

"Those that canceled the last couple of years, we are actually happy to let them keep their same seniority, those that have been with us for a really, really long time," Siegel said. "Obviously, if their old seats aren't available, they aren't available. But in almost every case, we have been able to get them very comparable seats or even better."

The rush in ticket sales shouldn’t surprise anyone. A better question that needs to be asked— does the $2 billion price the franchise is being sold for make financial sense?

"It was an extraordinary and surprising price," said Andrew Zimbalist, a professor of economics at Smith College in an ESPN Los Angeles report. "I rarely admit to not anticipating these things but I did not anticipate a $2 billion price. Keep in mind, in addition to the price, the new ownership group will have to invest something in the neighborhood of $300 million to refurbishing Dodger Stadium and that price does not include $150 million for the surrounding real estate. At the end of the day, you have to question this deal."

Andrew Zimbalist is to the sports industry what EF Hutton was in those infamous investment commercials, except when Andrew Zimbalist talks – you better listen. Zimbalist knows what he speaks. Zimbalist isn’t the only economist who doesn’t believe this deal makes sense.

"It's the craziest deal ever; it makes no sense. That's why you saw so many groups drop out," said Mark Rosentraub, a University of Michigan sports management professor. "I don't get it. The numbers just don't work. It doesn't make business sense. Nobody came up with this number. Under the most favorable circumstance you broke $1.1 billion with $1.4 billion getting crazy. Now you're up in the $2 billion range, which is over $800 million more than what pencils out for a profitable investment for a baseball team. If making money doesn't count, this is a great move. But now we're into buying art and I can't value art. I can just run the model numbers and this doesn't make sense."

The sale price might not make economic sense to two leading and well-respected sports economists, but the Dodgers remained one of sports strongest and marketable brands – and that was with Frank and Jamie McCourt driving the team into bankruptcy protection.

The once-proud franchise was driven into bankruptcy by the McCourts last June when they couldn't meet player payroll or pay bills after MLB Commissioner Bud Selig declined to approve a $3 billion agreement between FOX and the Dodgers to extend their television broadcast rights. The new ownership group can expect to sell the Dodgers local TV rights for at least $3 billion.

"It's impossible for them to make money with this," one highly ranked executive told ESPN’s Buster Onley. "Impossible. I know their revenue streams, and even if they get a TV deal, that's a huge payoff; they can't make money."

Said another highly ranked executive: "From a business perspective, this can't work."

If they can’t make money, why did Mark R. Walter, controlling partner, as well as Magic Johnson, Peter Guber, Stan Kasten, Bobby Patton and Todd Boehly pay $2 billion?

They also now control the land around Dodger Stadium, with Frank McCourt as a partner. There have been suggestions, and at this point they are nothing more than suggestions, Walter and company may sell part of their land to groups interested in building an NFL stadium in Chavez Ravine. There lies one of the biggest problems with the proposed sale – Walter and his group agreed to control the land in and around Chavez Ravine with McCourt.

"I still don't understand how you could pay $2 billion for the Dodgers and not get the clear title to the Chavez Ravine land," Rosentraub said. "Look at everybody who has ever been a partner with McCourt. I think they would tell you to get stock in Gaviscon because you're going to need it. Maybe he'll have a life-changing experience but you have a guy with a track record of getting into legal action with his partners on deals going back more than a decade. You may end up spending a great deal of time in court and paying legal fees against your new partner. I don't get that one. I know people who backed out of the deal because they didn't want any kind of partnership with him."

"It's problematic," Zimbalist said. "He was looking for some kind of ongoing revenue stream and he got it. Here's a guy who borrowed practically all the money to buy the team for $430 million and now he's selling it for $2.15 billion and he's coming out with a healthy capital gain – it's repulsive. This is someone who doesn't deserve to walk away with a healthy profit after eight years of running the Dodgers in the most egregious, the most inefficient, the most self-interested, and the most vainglorious, idiotic way possible. It really is repulsive that he will still be making a profit in some way."

Zimbalist and Rosentraub are masters at understanding how the economics of the sale of the Dodgers can – or as they believe – can’t work. However, what they may have discounted is the “value” Walter and his group sees in buying the Dodgers.

Walter is CEO of Guggenheim Partners, a Chicago-based financial consulting firm estimated to be worth more than $100 billion. Guggenheim Partners are now the parent company for the Los Angeles Dodgers. Could Guggenheim leverage any losses they incur as owners of the Dodgers against profits Guggenheim generates? Or is it simply a matter of boys with nearly unlimited resources wanting to be the boys with the biggest toys. Maybe to Walter and his group it’s that old expression “He who has the most toys wins” and with the Dodgers Guggenheim has a very big toy.

For Sports Business News this is Howard Bloom

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