Categorized | Mark Timmons

I Still Hope For the Best but the Facts are Scary

Magic Johnson and Guggenheim Partners must have really wanted the Dodgers and I know that they will probably start their own TV network (which will require an investment of more $$$) and they are partners with McCourt in developing the land around Dodger Stadium (which may take more $$$, depending upon the plan and that could be a REALLY GOOD thing, but it takes more capital).  Dodger Stadium needs renovation and I would assume that will cost $250,000,000 to $350,000,000.

Of course, the Plan could be to raze Dodger Stadium and build a NFL Stadium for the Chargers, Jaguars, Vikings or Rams.  Maybe Magic is the front man because he could get the city of LA to build New Dodger Stadium downtown.  Would the citizens of LA do that?  Would they authorize public funds to the tune of $1.1 Billion dollars for Magic?  They wouldn’t for everyone, but they might for the Magic Man.

Yesterday, Ken wrote this:

“Insurance companies have annual requirements to hire auditors and actuaries prior to filing annual reports with the insurance companies domiciled state’s Insurance Commissioner’s Office. So the Guggenheim investment in the Dodgers will be subject to annual review of personnel hired by the insurance company and employed by the Insurance Commissioner’s Office. Therefore, you can expect the Dodgers to be distributing more to the insurance company than the Dodgers did inthe past to Frank

Now, I don’t know how much that will be, be I assume it will be a lot.  Maybe Ken could give us and idea of how much to expect.

What I am worried about is this type of big corporate ownership where there are lots of people involved.  That can be problematic.  Some of you have said “these guys are billionaires and know what they are doing.”   The landscape of American Business is littered with colossal failures of “can’t miss” opportunities.

I’m not saying that this will be a failure – it has a lot going for it.  Stan Kasten is a guy who knows how to runs a sports franchise.  Magic characterizes him as a “Baseball Guy” and I do disagree with that.  He has never shown baseball acumen, but is adept at running the business side of a team, which is vitally important.  He will need a good “Baseball man” as general manager, like he had when he was president of the Atlanta Braves.  Is that Ned Colletti?  It could be, or not!  Ned will have a shot whether we like it or not.

Magic is the face of the organization – he’s the PR guy, the marketing guy – he’s the brand and will be loved for it.  Fans are excited, but Magic has very little to do with what happens behind the scenes.  Here’s are the questions I have:

  • Will Guggenhiem spend to upgrade the Dodgers scouting and international player development department?
  • Will they upgrade the Stadium?
  • Will they authorize a payroll of up to $150 million?
  • How much will ticket prices go up (and they will as they are currently one of the lowest in MLB)?

Arash Markazi of ESPN/LA raises some of these same questions:

While Los Angeles sports fans celebrate the sale of the Los Angeles Dodgers to a group headlined by Magic Johnson for a record price of $2 billion, several sport economists believe the group paid close to twice as much for the team than it is actually worth and question the viability of the deal.

“It was an extraordinary and surprising price,” said Andrew Zimbalist, a professor of economics at Smith College. “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.”

No one realizes more than I do that the experts are not always right.  Many of the experts criticize because they can’t “DO.”  But, you at least have to consider it.   He also reports this:

“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.”

Now comes the scary part:

One of the biggest reasons the Dodgers sold for $2 billion is the regional sports network battle currently being waged in Los Angeles between Fox and Time Warner. Last June, commissioner Bud Selig rejected a proposed 20-year, $3 billion deal between the Dodgers and Fox. The decision, according to Dodgers owner Frank McCourt, pushed the team into bankruptcy and forced him to sell the team. Last December, the Angels agreed to a new deal with Fox worth at least $3 billion over 20 years, which helped the team land Albert Pujols and C.J. Wilson in free agency. Last year, the Lakers announced they would be leaving Fox to join Time Warner for a deal reportedly worth $5 billion over 25 years.

The Dodgers are expected to sign a similarly lucrative deal with Fox or Time Warner, or they could simply start their own regional sports network like the Yankees have with the YES Network. The problem economists have with the sale of the team being tied to the television contract is teams use their television deals as revenue to improve the team, not to offset the costs of overpaying for a franchise.

“One of the things that commissioner Selig was trying to avoid when he did not authorize the contract between McCourt and Fox was he thought McCourt would take the money and pocket it instead of using it to build the Dodgers,” Zimbalist said. “That indirectly will happen anyway because McCourt is going to get his money and the new ownership will have to use a good chunk of the television money to pay off their asset purchase.”

So, before you go all bombastic on me, contemplate what that means.  Read it carefully and try to understand.  I am hopeful, but I remain skeptical.  Please convince me otherwise with facts, not accusations.  I’m glad you are all happy and giddy because “Magic is the owner of the Dodgers”, but I am not ready to drink the Kool-Aid, although I want to.

The article ends like this:

Johnson, however, still can’t make all the numbers of the record sale of the team add up for many economists, who are skeptical that this deal will prove to be a success in the end.

“If they can figure out a way to put a basket above the pitcher’s mound maybe it will be a great match,” Zimbalist said. “Look, Magic is an icon in L.A. It creates a new energy that will be positive for the club, but this group has a big challenge ahead of them and it remains to be seen if the price they paid for the club was a good choice or not.”

I’ll leave it on that note.  Convince me I should drink the Kool-Aid.  Please convince me!

 

About Mark Timmons

When you see the invisible, you can do the impossible!

9 Responses to “I Still Hope For the Best but the Facts are Scary”

  1. RogerCraig says:

    I am skeptical but hopeful. I am certainly anxious to move on from the McCourt era but what does the future hold? That concerns me, but I hope for the best. When it shakes out, it will be all about the Benjamins.

  2. Mike Dixon says:

    Grape Kool-Aid is my favorite….

  3. Mark_Timmons says:

    I prefer Blue… with Cabo!

  4. Bob says:

    I want to get on the bandwagon, but I am scared for all the reasons you mentioned.

  5. markw says:

    I share many of the same concerns, but remember this: the new owners are in the business of making money. Long-term sustainable money. They also understand that to make money you have to spend money. I’m hopeful they will turn the dodgers into what they used to be.

  6. DodgerDude says:

    What scares me is that McCourt immediately stopped the auction and tool the Guggenheim bid because it was a half a billion dollars more than the rest.

    That smacks of stupid!

  7. Anonymous says:

    I starting reading this article and thought “this is going to be great” and then I saw that Mark quoted me. Doh!

    The deal makes no sense unless they create a new Cable Channel and also stream games over the internet for a fee within 5 years. Maximizing the value of the team through a Cable channel also makes it difficult to raise ticket prices lest people stay home. If the Dodgers want to make the stadium family friendly then they should deal with the gangs and not raise ticket prices until the Dodgers win their division.

    Frank will be able to put equity into the land development while Guggenheim adds construction and bridge loans at or slightly above market rates. Guggenheim can also lend money for the creation of the Cable Channel. Depending upon the size of the Guggenheim insurance company(s) – $100 Billion in assets or more? A diversification issue will not be a significant issue.

    The real issue is the return on investment. Since we can assume that Magic and the Boys paid the highest synergistic value and other investors would have paid less, the value of the Dodgers will not grow until the Cable channel is a going concern. Therefore, my opinion is that the Dodgers will need to make distributions from the Limited Liability Company during 2012 through 2014 in order to demonstrate that the investment is solid. In future years the value of the aggregate Dodger investment should appreciate and the need for distributions will slowly dissipate.

    Actually the do not have to “pay off” their investment, they just have to provide a reasonable return on investment through a combination of appreciation and distributions.

    Maybe Magic will begin fracking under the stadium. Aren’t there a few rigs around the area? Build some parking garages and put windmills on top of them. Then maybe the balls will be flying out of the stadium like Coors Field, 

    The hillsides will eventually be covered by something. Will it be windmills, Moreno’s signs, oil rigs, retail shops, business condos, or residential condos?

    The deal only works with a lot of construction and $4-5 billion of income over 20 years from a Dodger owned Cable Network.

    It is a gamble that just might be worth taking. Guggenheim will probably start spinning off parts of this investment within 10 years.

  8. Kip says:

    So tired of all this negative hand-wringing. Get a grip.

  9. Bill Russell says:

    Why is there gang problems at Dodger Stadium? Because of Byran Stow? Well that wasn’t gang related. It was a few idiots drinking alcohol and fighting at the park. This happens everywhere even oversea’s at soccer games. Anytime you mix alcohol and idiots you have issues but this doesn’t mean there are gang problems at Dodger Stadium. I have attended many games over the past 40 + years and never saw gangs scaring people at the stadium. I have seen gangs wear Yankee hats, Raider jerseys, Tiger hats and several other sports teams apparel. How do you address the issue of gangs wearing the team logo?

    Do gangs have time for sports? And if they do, why would they pay admission to a public event to cause problems? Is all tatt’ed up people in L.A. a gang member? Come on people

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