The worst possible lede sentence for a blog of my sorts would be ... "Back in the day, ..." but this one deserves it.
Back in the day, Wall Street Journal reporter John Helyar pioneered sports business stories like Jacques Cartier navigated the St. Lawrence. The Atlanta-based reporter was one of the first at "The Journal" to realize the growing influence of sports stories in the business world and 20-something years later, he's still getting it done, now with Bloomberg.
In this instance, he is saddled up for a ride with Bloomberg columnist/reporter Scott Soshnick, the 2000-12 version of a sports business frontiersman extraordinaire and Delaware-based Steve Church, a newsman I hope to meet.
Here is the full version of their story on the LA Dodgers TV deal, possibly the most interesting sports biz story of the year 2012. In layman's terms, the TV deal set the table for the purchase of the team, the purchase of the team and the influence of the new ownership group, including Magic Johnson and CEO/Baseball genius Stan Kasten, set the table for the blockbuster trades and player acquisitions made by the Dodgers this summer, especially the mega-deal with the Boston Red Sox for Adrian Gonzalez and some throw-ins. However, in my view, the whole play for the LA Dodgers is hidden the vast acres of land near Chavez Ravine - aka the "parking lots," which upon that stone can someday lay the foundation for an NFL stadium and franchise in the City of Angels.
The TV rights for the whole shebang, including pre-game, post-game, preseason and off-season NFL programming, coupled with the MLB Dodgers would be a formidable programming juggernaut in SoCal as the LA Lakers side with Time-Warner and Comcast/NBC scout the landscape.
Here's Bloomberg's look at the LA Dodgers situation. Good stuff.
The Los Angeles Dodgers have shot
out of bankruptcy and into the ranks of baseball’s biggest
spenders, fueled partly by a secret agreement between former
owner
Frank McCourt and
Major League Baseball that may limit the
revenue the team is obliged to share with less prosperous clubs.
A settlement ending their 2011 battle in
U.S. Bankruptcy
Court gives the Dodgers’ new owners a chance to cap income
subject to revenue-sharing from a proposed regional sports
network at about $84 million a year, according to five people
familiar with the confidential “special terms.” With TV
sports-rights experts saying the team could get as much as $225
million a year from a network’s rights fees, the Dodgers may
enjoy an annual unshared windfall of as much as $141 million.
The “special terms” help explain the Dodgers’ improved
finances since emerging from bankruptcy in April by being sold
to a group led by Guggenheim Partners for $2.15 billion. That
sum was almost twice the record price for a U.S. sports team,
and the new owners have been acquiring stars such as infielders
Adrian Gonzalez and Hanley Ramirez, committing more than $400
million to multiyear contracts.
“It’s an incredibly great deal for the new ownership that
was obviously a factor in the amount of money they were willing
to pay,” said
Michael Cramer, who handled TV rights while
president of the
Texas Rangers and now heads a University of
Texas sports and media studies program. “Any team in the league
would say, ‘Can I have that?’ It’s going to create a lot of
owners saying, ‘Where’s mine?”’
MLB Dispute
While MLB disputes the extent of the revenue-sharing break
afforded by these “special terms,” the settlement cedes
authority over their interpretation to a court-appointed
arbitrator, retired federal judge Joseph Farnan. He acted as a
mediator prior to the settlement and during the Dodgers’ auction.
The “special terms” set the Dodgers’ annual TV rights
fees from the regional network at about $84 million, plus a 4
percent annual escalator, for the life of whatever contract the
team signs setting up the network, said the people familiar with
the terms.
That figure sets the amount of revenue the Dodgers must
share. Baseball rules require that big-market teams share 34
percent of regional network rights fees with small-market teams.
Unlike National Football League franchises, which get equal
parts of league-negotiated TV rights fees, MLB teams have widely
disparate broadcast revenues. The 34 percent revenue-sharing
requirement is meant to level the financial playing field a bit,
though Cramer said accounting techniques often limit the tab for
teams with part-ownership of a regional network.
Money Stays
“You simply don’t pay the team if you’re the owner of the
channel; the money stays in the network,” he said. “It’s a
contractual relationship with yourself.”
The Dodgers TV rights valuation was fixed almost one year
before the start of talks on a new contract, under the terms of
its current one with Fox Sports, at a time of soaring TV
broadcast rights deals. Though $84 million is about double the
Dodgers’ present rights fees, it became a below-market sum the
month after the settlement. Fox Sports is a unit of
News Corp. (NWSA)
The
Los Angeles Angels, the market’s number two baseball
team, signed a 17-year $2.5 billion regional network contract in
December with Fox Sports, according to Forbes. The number one
Dodgers’ leverage on TV rights has been increased by intense
competition for local sports programming in Southern California.
The
Los Angeles Lakers more than tripled broadcast revenue
by signing a deal with Time Warner Cable last year which brings
$200 million a year over the contract’s guaranteed 15 years,
according to Forbes. The cable operator has built two new
regional sports networks around the NBA team, one English-
language and one Spanish-language.
Dodger Network
Ed Desser, a
Santa Monica, California-based TV sports-
rights consultant who advised the Lakers in negotiations,
projects that the Dodgers’ annual rights fees from a regional
network would average $175 million to $225 million over a 20-
year contract. If the team owned a stake in the enterprise, it
could take the difference between $84 million and the Desser-
projected range in dividends, an unshared source of income.
The settlement allows the Dodgers to create a network on
which revenue-sharing would be effectively capped at about $84
million, plus the annual 4 percent escalator, depending on how
the contract is crafted and the entity is structured, according
to two people familiar with the special terms. Comparing the cap
amount with Desser’s highest estimate of rights fees means the
network may generate an annual windfall of $141 million.
Actual Fees
It doesn’t work that way, said Robert Manfred Jr., an MLB
executive vice president who oversees revenue-sharing matters.
If the Dodgers command a premium for TV rights, the team must
share revenue based on its fees income from the actual contract,
according to Manfred, not the settlement-set $84 million a year
level.
“The basic treatment is exactly the same as every other
team in baseball,” Manfred said. “Any dollar that’s actually
received in rights fees or signing bonus by the Dodgers is
subject to revenue-sharing.”
He said the auction produced high offers not because of the
special terms but because a flagship baseball team was available
in America’s second biggest media market and under favorable
circumstances.
Attractive Opportunity
“The Dodgers contract was expiring at a time when there
was fierce competition in the L.A. broadcast market,” Manfred
said. “The opportunity to exploit that situation was very
attractive to the bidders.”
The Dodgers’ spending spree on players hasn’t paid off so
far this season. Since an August 25 trade with the
Boston Red
Sox, which landed four players with more than $260 million of
contract obligations, the Dodgers have lost 17 of 29 games,
damaging their chances to make the National League playoffs.
Torie von Alt, a spokeswoman for Guggenheim, said
executives at the firm would have no comment.
Mark Walter, chief
executive officer of the Chicago-based investment firm, is the
Dodgers’ controlling partner.
Stan Kasten, the team’s president,
also declined to comment.
The “special terms” was only one of MLB’s departures from
its usual team sale procedures. McCourt, not Selig, picked the
winning offer, from a list of bidders pre-approved by MLB. U.S.
Bankruptcy Court Judge Kevin Gross, not baseball’s owners, made
the ultimate approval. Joseph Farnan, the retired judge, was
empowered to resolve disputes in the course of the Dodgers’
auction and decide the special terms’ interpretation.
Eager MLB
Taken altogether, the settlement terms suggest MLB was so
eager to get McCourt out as owner and to avert an open-court
airing of charges he’d leveled against Selig in filings that it
made significant concessions, said Phoenix bankruptcy attorney
Thomas Salerno.
“McCourt had a lot of leverage, because MLB did not want a
public hearing on the inconsistencies with which it treats
teams,” said Salerno, who represented the
National Hockey
League’s Phoenix Coyotes in bankruptcy proceedings in 2009.
Robert Siegfried, a spokesman for McCourt, said the former
owner declined to comment. Manfred said MLB’s decision to settle
was motivated solely by its desire to bring about a transfer of
Dodgers ownership quickly.
After the settlement was reached, disagreements broke out
about how to interpret the “special terms,” according to four
people familiar with the events. They are considered so
sensitive that only a few numbered copies were made. Gross
reviewed them, but didn’t keep a copy and never made them part
of the official court record.
Secret Language
Manfred said team owners were briefed on this provision of
the settlement, but language of the “special terms” remains
secret. How much money, if any, will be shared beyond the $84
million plus escalator limit depends on how the network’s
contract is structured. In case of disputes, Judge Farnan will
have the final say.
At an April 13 court hearing to confirm the team’s sale,
Dodgers attorney
Bruce Bennett said the mediator had already
heard three disputes concerning the special terms during the
auction process, and “in all three of these mediations, Judge
Farnan found that Major League Baseball’s interpretation was
wrong and that the (Dodgers) or the bidder whose proposal was
involved was correct.”
Arbitration Powers
At the same hearing, MLB attorney
Thomas Lauria argued that
Farnan’s arbitration powers should end with the close of the
Dodgers’ sale, saying, “Not one of the other teams has this
mechanism where they can go to a mediator to get enforcement or
seek enforcement or get other remedies that are not subject to
anybody else’s review. We’ve got a league. Everybody’s got to be
the same; you can’t have the Dodgers and 29 others.”
The argument didn’t persuade Judge Gross. Still, special
treatment for the Dodgers bodes ill for baseball, said Andy Dolich, a former Oakland Athletics executive vice president and
member of one of the bidding groups in the Dodgers auction.
“If you don’t have a codified set of rules that everybody
is playing with then you have a different game,” said Dolich,
who has also held management positions in the other three major
U.S. sports leagues. “The ongoing divide between top and bottom
in all sports creates a dynamic of question marks.”
In 2004, MLB violated its own 60/40 rule, requiring teams
to maintain a ratio of 60 percent equity to 40 percent debt, in
approving McCourt’s $421 million purchase of the Dodgers. He did
it “entirely with borrowed funds,” according to a bankruptcy
court filing by baseball’s lawyers.
News Corp. Pressure
Selig bowed to pressure from seller News Corp. to approve
McCourt, who, unlike some other potential bidders, had agreed to
extend the Dodgers broadcast contract with Fox Sports for 10
years, according to people familiar with the transaction. Fox
was paying baseball $420 million a year at the time for national
broadcast rights.
News Corp. advanced almost half the purchase price,
according to sale documents, with most of its $196 million of
loans secured by McCourt-owned Boston real estate.
McCourt turned to Fox Sports for a financial lifeline again
in June 2011, when the Dodgers were in a cash crunch and faced
with the possibility of missing payroll. He negotiated a 17-year,
$3 billion contract extension of the Dodgers broadcast deal,
with a $385 million upfront payment which would have both
provided liquidity to the team and enabled the owner to pay a
divorce settlement and satisfy personal debts.
Selig rejected the deal, which in its first year would have
paid the Dodgers $84 million in rights fees, saying in a June 20
letter to McCourt that a desperation-driven contract “failed to
fully maximize rights fees through a competitive process, as the
Los Angeles Lakers recently did... By disapproving the proposed
transaction, I am ensuring that
Los Angeles Dodgers LLC will
have the opportunity to fully exploit its media rights.”
A week later, McCourt put the Dodgers into bankruptcy.
To contact the reporters on this story:
John Helyar in Atlanta at
jhelyar@bloomberg.net;
Steven Church in Wilmington, Delaware at
schurch3@bloomberg.net;
Scott Soshnick in
New York at
ssoshnick@bloomberg.net
