How the Dodgers’ Owner Got His Financial Lineup in Place
When he sold the Dodgers to Fox Sports Enterprises in 1998, having lost $12 million the previous season, Peter O’Malley declared Major League Baseball’s era of family ownership over.
Player salaries had grown too high for a baseball-only business to succeed, O’Malley said. He figured that corporate owners such as Fox Sports, a unit of media giant News Corp. with the ability to cross-promote the team through its TV properties, were the wave of the future.
This week, Frank McCourt begins his second season of trying to prove O’Malley wrong.
The question is the same today as when the Boston real estate man emerged 18 months ago as the owner-to-be: Is his wallet fat enough to keep the Dodgers competitive against teams owned by billionaires, well-heeled partnerships and Fortune 500 corporations?
Because McCourt put up little cash, his purchase has been seen as a high-wire act. But sports business experts say revenue-boosting moves in the off-season, combined with the underlying strength of the Dodgers -- the team’s large and loyal fan base -- have convinced them that McCourt has a better-than-even chance of success.
“It’s a great turnaround opportunity -- a great brand, a great market with deep fan loyalty and very positive demographics,” said New York investment banker Salvatore Galatioto, who for years ran the sports finance business at Lehman Bros. and recently opened his own firm.
Fans returning to Dodger Stadium this weekend for the Freeway Series against the Angels are seeing a number of changes in the 43-year-old ballpark aimed at increasing revenue.
For example, some 1,600 premium seats have been added along the baselines. A 3-foot-high, 1,100-foot-long electronic “ribbon board” has been installed on the facing of the loge section to flash advertising, along with scores and statistics. Chicago-based Levy Restaurants, which used to handle just the premium dining, has taken over food concessions for the whole stadium.
McCourt, 51, has been widely criticized for a series of moves since buying the team, including gutting the front office, installing wife Jamie McCourt as executive vice president, trading popular players such as All-Star catcher Paul Lo Duca, failing to re-sign third baseman Adrian Beltre and dumping longtime announcer Ross Porter.
The owner made more headlines late last week -- firing two high-ranking executives, expanding his wife’s duties and appointing his 23-year-old son Drew as marketing director.
Amid lingering doubts about his stewardship, McCourt recently drew back the curtain on the team’s finances for the first time, explaining how his $421-million purchase was structured and how he intended to turn around a business that was losing as much as $50 million a year when he bought it.
The key points:
* An improved TV-rights deal signed with Fox at the time of the purchase, plus increases from other TV and radio fees, should boost revenue by about $15 million this year.
* The new field-level seats, which sell for $65 to $400 apiece, along with price increases on seats in the most desirable locations, should bring in $10 million to $13 million in new revenue, depending on attendance.
* Parking-fee increases imposed last year for most spaces and this year for season-ticket holders, plus new sponsorship and concessions contracts taking effect this season, together should add $10 million.
* Payroll is down by $10 million from 2003, Fox’s last season. It remains one of the National League’s three highest, however, enough to keep the team competitive, McCourt said.
Under the terms of the purchase, Fox agreed to give McCourt’s Dodgers two so-called training-wheels payments: $35 million last year and $15 million this year. McCourt said the first payment and the parking and broadcast fee increases -- plus an attendance surge from the team’s first divisional championship since 1995 -- put the Dodgers slightly in the black last year.
This year, he said, the reduced payroll, additional ticket revenue and new sponsorship and concession deals should more than make up for a smaller payment from Fox, again putting the team in the black.
“Being profitable isn’t the point,” McCourt said in an interview in his wood-paneled office overlooking left field. “The point is to at least break even and have a sound, healthy business.”
Professional sports ownership has always been more about building the asset value of a franchise over time rather than taking out profit along the way.
McCourt’s approach to real estate has been similarly deliberate. The jewel of his holdings is a 24-acre harbor-side parcel in South Boston that has mushroomed in value since he bought it 25 years ago, but it has been used mainly for surface commuter parking lots.
Long criticized in Boston for being too slow to develop the high-potential site, McCourt finally took a big step last month, forming a joint venture with Related Cos., developer of New York’s Time Warner Center and the $1.2-billion Grand Avenue project in downtown Los Angeles.
Given his real estate background, McCourt’s critics in Los Angeles suspected from the outset that his real interest in the Dodgers wasn’t in building a world-championship team but in bulldozing Chavez Ravine for condos and retail.
Some of his would-be partners had the same impression. McCourt said his original plan was to buy the Dodgers with a group of investors. As envisioned, he would be the controlling owner but would hold a 40% stake.
But the partners, whom McCourt declined to identify, pulled out when he made it clear that his agenda didn’t include razing Dodger Stadium.
“I felt that if I led with my real estate chin, it would confirm all those fears and we’d never be able to overcome it,” McCourt said.
Thus, midstream in his negotiations with Fox, McCourt switched to Plan B: sole ownership.
It was a risky approach. No other mega-market team in baseball -- not the New York Yankees or Mets, not the Chicago Cubs, the Philadelphia Phillies or the Boston Red Sox -- is owned by a single individual.
McCourt said the work he did at the negotiating table, before ever setting foot in Dodger Stadium, would prove to be the most important factor in his success or failure as an owner.
“We looked at the structure of the deal as being the key to turning around the Dodgers,” he said.
McCourt said his approach was not to quibble with the $430-million asking price but to push for other concessions that would make the deal work for him.
Fox Sports, by this time, was what real estate agents call a motivated seller. During the two years that Fox Sports had the Dodgers on the market, a number of prominent Angelenos kicked the tires but ultimately balked at the price.
Executives at parent News Corp. declined to comment for this article. However, people familiar with the company’s strategy said it already had accomplished its real purpose in buying the team: establishing a regional cable sports network in the nation’s No. 2 media market, thereby thwarting the similar goal of rival Walt Disney Co.’s ESPN.
The terms, as McCourt described them, appear highly favorable to the new owner. Significantly, nearly half of the $421-million final price involved seller financing by Fox that required no interest payments from McCourt for the first two years and obligated Fox to kick in the $50 million in training-wheels payments.
The deal called for little cash upfront and allowed McCourt to own the Dodgers outright while continuing to control the real estate and other assets he used as collateral.
According to McCourt, Fox’s side of the financing consisted of three separate notes, or loans: a $125-million note due in 2006 and secured by McCourt’s South Boston property; a $40-million note due in 2008 and secured by bank letters of credit; and a $31-million note due in 2007 and convertible at the end of the term at Fox’s option into preferred stock in the company McCourt formed to buy the Dodgers.
Critics have questioned whether McCourt would be able to pay off the $125-million loan or would end up forfeiting his South Boston land to Fox.
His new joint venture with Related Cos. apparently answers such doubts. McCourt said the plan was for the joint venture to buy the land from him and use part of the proceeds to repay Fox. The joint venture then would develop the property, which McCourt says has a potential value of more than $300 million.
McCourt financed the $225-million balance of the purchase more conventionally, with $150 million in commercial loans from Bank of America and $75 million from Major League Baseball’s revolving loan fund for team owners.
Before the sale, Fox had legally split its holdings into two pieces: the baseball-related assets, including the team itself, and the real estate. This allowed McCourt to limit the amount of debt specifically carried by the team and thus to stay within Major League Baseball’s guidelines.
Even so, economist Andrew Zimbalist, a Smith College professor who studies pro sports, believes that baseball winked at its own rules in approving the deal.
“Baseball is happy to have all this debt on a major-market team because they can be pretty sure the Dodgers won’t be pushing up salaries,” Zimbalist said.
Major League Baseball officials, through a spokesman, declined to comment, citing a policy against discussing individual team finances.
The borrowing has left McCourt with annual interest payments of more than $10 million. He said the Dodgers could break even at the current payroll level with annual attendance of 3 million, a level the team has achieved for nine years in a row despite failing to make the playoffs in seven of those years. But if the team struggles and attendance drops below 3 million, McCourt could be forced into further payroll cuts.
“The Dodgers have always had a very loyal fan base,” said Robert A. Daly, the former Warner Bros. studio head who ran the team for four years under Fox as a 5% owner. “When you decide to substantially raise the ticket price and cut the payroll, naturally you make more money. But you run the risk, if it backfires, that you alienate your fan base.”
To this point, increases of 50% or more on certain premium seats haven’t hurt overall sales. The Dodgers announced recently that advance ticket sales were off to their fastest start since 1993, with more than 2 million sold. That includes 22,000 season tickets, up 2,000 from a year ago.
Last season’s playoff run helped, of course, but fans also may be accepting because prices had some room to rise: Last year the Dodgers ranked 20th of the 30 major league ballclubs, with an average ticket price of $16.92, according to Team Marketing Report, a Chicago research firm. The stratosphere was occupied by the World Series champion Red Sox, with a $40.77 average. The Cubs ($28.45), the Phillies ($26.08) and the Yankees ($24.26) were next in line.
Martin Greenspun, the Dodgers’ chief operating officer, said the average ticket price this year would be in the $18 to $19 range, again below the major league average.
What’s more, the Dodgers left prices alone on about 80% of the seats.
“We wanted to keep the vast majority of seats affordable for the average fan,” McCourt said.
McCourt, whose four sons range in age from 14 to 24, said he intended to prove that family ownership could work in the big leagues.
“God willing,” he said, knocking on a wooden conference table, “our kids are going to own this team.”
Times staff writers Sallie Hofmeister, Roger Vincent and Steve Henson and Times research librarian John Jackson contributed to this report.
Monday: A profile of controversial General Manager Paul DePodesta.
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The math of the deal
Frank McCourt bought the Dodgers last year for $421 million, using several financing vehicles and a variety of collateral. Beyond that sale price, McCourt paid $15 million in banking fees and closing costs and $25 million for park improvements and other expenses. Here is the breakdown:
Amount (in millions): $150 Commercial loans
Source: Bank of America
Collateral: Dodgers/L.A. real estate
Amount (in millions): $125* Two-year note
Source: Fox Sports
Collateral: Boston real estate
Amount (in millions): $75 Revolving loan
Amount (in millions): $40 Four-year note
Source: Fox Sports
Collateral: McCourt personal assets
Amount (in millions): $31 Three-year convertible note
Source: Fox Sports
Collateral: McCourt personal assets
*Does not include $20 million in interest due at end of term
Source: Frank McCourt
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