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18 April 2008

Forbes new valuations out: A's worth $323 million

For a commissioner, Bud Selig makes a pretty good CEO.

League revenue is up again, this time 9.3% over last season. That's actually down from the last three seasons, when they typically had 14% gains. Revenue is still impressive and will only go up through the end of the current CBA. Yield like that would be an excellent investment for those looking for a mid cap. Of course, MLB is entirely private so no one outside the Lodge could entertain such notions. Regardless, it's impressive.

The A's experienced an 11% jump, from $292 million to $323 million. They continue to ride the revenue sharing gravy train, as local revenue pales in comparison to most of their brethren. The welfare check should only become bigger next season as early attendance figures from the first two weeks portend a low season-end total. Forbes' summary of the A's financial situation is incorrect in that it identifies TIF as a funding mechanism for the ballpark. TIF requires bond money be raised. They're not doing that in Fremont. Instead, privately generated proceeds from the sale of housing rights will help foot the bill.

I'm surprised that this year's edition didn't cover the debt issue. Quite possibly, the toughest task for Selig was to whip owners into shape by getting them to spend less. Over the last four years, teams have dropped from a collective 39.7% in debt to 32.7%, and that includes the two new stadia being built for the NY teams.

click for a larger chart

Look at the values on a team-by-team basis, and you'll see a major trend downward for most of them. The old 60-40 debt rule may be obsolete, but it still informs club executives on how to run their teams, just as 50-60% of revenue is comfortable salary "guideline" for the teams.

Nowadays, there's a simplification of the debt rule: teams can't be in hock over 10 times the average EBITDA over the past two seasons. Notice that the A's current valuation is exactly 10 times that of their average operating income from that period? I doubt it's a coincidence. Moreover, the first $36.5 million in debt grandfathered from previous years doesn't count, so if you're Fred Wilpon or Frank McCourt and you borrowed heavily to buy your teams, it's not that bad. And as an incentive to upgrade to new digs, any team incurring stadium debt gets to bump up to 15 times EBITDA for up to 10 years after the facility is complete. The difference between 10 and 15 times doesn't sound like much. It's only $75 million. Since income is expected to rise thanks to the massive payroll drop, so will that debt ceiling. Look for this:
  • $30 million in earnings each year in the two years prior to the ballpark opening
  • Multiply that figure by 15 to get max debt load, $450 million (which equals the projected ballpark construction cost)

There is, of course, the matter of player salaries. They're the biggest expense and so they factor in. However, that fat $36.5 million deductible comes in handy, especially as a team's payroll drops to approach that figure. Again, the rule is not a hard and fast rule like the NFL's salary cap, with Selig or Bob DuPuy getting all punitive every winter. Referring back to the chart, it appears to be set up so that when teams are forced to go into major debt like the Yanks or Mets, the other fiscally responsible teams help soften the blow. In that sense, MLB and other leagues are akin to conglomerates, with each team acting as a single business unit. When a major profit center (Yanks/Mets) has to invest to invest in a new plant (stadium), the other units tighten up in response. After all, it's the company's overall health, not a business unit's, that gets trumpeted by Selig. As the new plants open and become amortized, others take their turns.

Call it MLB's "Circle of Life."

12 comments:

Anonymous said...

Hi there,

Nice article. Interesting thoughts about thinking of MLB teams as business units.

I think the Y-axis label on your chart is wrong -- it should be %, not $MM. It had me confused until I dug up the actual forbes page.

-phastphill

Marine Layer said...

Fixed.

Jeffrey said...

Personally I have thought of MLB team as business units for a long time.

Every time I hear George Steinbrenner rail about revenue sharing I think, "Play an intrasquad scrimmage, or hell the Red Sox, 162 times a year and see how much 'local' revenue you have."

It appears, using EBITDA as a measure, that revenue sharing and the larger "commissioner as CEO/teams as business units" dynamic has been pretty good for baseball.

Tony D. said...

R.M.,
Way off the subject of the A's worth and Cisco Field in general. I've seen renderings of Ed Roski Jr.'s proposed LA/NFL football stadium over at another blog: it looks similar to the Niners proposed stadium as it has luxury suites on one side, but it's built into a hill. It's also part of a larger, 600 acre development that includes a high-end shopping mall (such an original idea). My question: could we see the Niners or Raiders using this LA proposal as a threat to the locals? I.E. "If you vote down our stadium proposal we're off to LA!" Or in the case of the Raiders, "No improvements to the Coliseum once the A's leave, C YA!"

Jeffrey said...

I just looked at the LA football stadium web site. I really like how the stadium appears to be part of the hill.

Home of the second return of the Raiders?

Tony D. said...

R.M.,
Another "way off the subject" question. What's going on with that Giants "punishment" for their role in the steroid scandal? Bud Selig said the issue was to be settled by the end of Spring training, yet we already have a month of regular season under our belts...and nothing. As much as I would have liked (and as much as it would have made sense) for MLB to award the A's Santa Clara County from the G's, my thinking was that some suspension or fine would probably be in order. And yet we hear nothing. My thinking now is that absolutely nothing will happen to the Giants and that the issue will be quietly swepped under a rug. We obviously aren't hearing any uproars from fans, media or government now concerning steriod-gate. Getting away with giving a drug dealer unlimited access to the clubhouse...more power to yah brah!

Marine Layer said...

Ed Roski has dialed back his message in the past few days. He probably got the memo from Roger Goodell: NFL has other things to deal with like the labor situation.

Roski has minority shares in the Lakers and Kings. Since he's heading this NFL charge, my guess is he wants to buy (at least a majority share) whatever NFL team comes to town. Problem is no team is outwardly willing to sell right now.

There will be no further punitive measures against the Giants. To do so would only dredge up more of the past and Selig wants to be as far away from that as possible.

Anonymous said...

Sports writers are not exactly magna cum laude jounalism "wanna future Pulitzer" graduates of the programs at Columbia or Northwestern. Same goes for their editors and especially their readers . With Bonds and Clemens retired , baseball steroid stories are so " last year " for today's short attention span internet reader.

Jeffrey said...

Actually, the enw drug testing agreement announced a couple weeks back included an announcement that no further punishment would be coming form the Mitchell Report info.

The bulk of the coverage was directed towards the lifting of suspensions for Jose Guillen and Jay Gibbons.

John said...

What's up with attendance this year? Seems like there have been a few games which have only made it into the 10,000's. From what I can find in past stats, these have been some of the most poorly attended games in years?

Marine Layer said...

I'm going to attempt to explain the attendance problem tomorrow. Think supply-demand curve.

Anonymous said...

As reviewed by your new thread about Dodger Stadium , future new or updated ballparks in highly populated built out areas, whether NFL or MLB ,will feature year round surrounding retail and residential " attractions " , the bulk of the development profits helping pay for the ballpark. This Cisco Field /Pacific Commons/Ballpark Village type model is popular - who wants to drive by a typical concrete wasteland that is a Candlestick or Coluseum on none game days ?
I guess they serve a purpose as a venue for amateur sports car clubs holding autocrossing events ,LOL.