Buy team, make money. That’s the tried-and-true formula in major professional sports, where even an owner who loses money running his team can cash in when he sells.
Frank McCourt should be Exhibit A for this theory. McCourt bought the Dodgers for $421 million seven years ago, and the team arguably has doubled in value since then.
Yet McCourt’s decision to take the Dodgers into bankruptcy means he could be forced to walk away from the team with absolutely nothing.
“What makes the Dodgers situation so striking is that this shouldn’t be happening in a major market. It is,” said Marc Ganis, president of SportsCorp Ltd., a Chicago consulting firm.
McCourt’s intention in putting the Dodgers into bankruptcy is to keep the team, not to sell it. However, the debt load and tax liability have increased to the point where the $150-million loan assumed in bankruptcy funding could wipe out much — if not all — of whatever profit he would make if he is ordered to sell the team.
McCourt has yet to resolve a divorce in which he claims sole ownership of the team and his ex-wife, Jamie, claims half-ownership. In a Bankruptcy Court filing last month, attorneys for Major League Baseball argued that “everyone wins” if the Dodgers are ordered sold, including his ex-wife and McCourt himself.
“Mr. McCourt will likely receive hundreds of millions of dollars,” according to the filing, “placing him in a position to pay all of his personal debts, and be left a very wealthy man.”
That might be more of a best-case scenario than a likely one, according to interviews and an analysis of court records conducted by the Los Angeles Times.
The Dodgers’ most recent financial disclosure statements in Bankruptcy Court showed their parent company had $483 million in debt as of June 30, according to an analysis by Raman Sain of Holthouse, Carlin & Van Trigt, the largest independent accounting firm based in Southern California.
In a June letter, Commissioner Bud Selig wrote to McCourt: “As best we can tell, you and your affiliated entities are currently responsible for over $550 million in debt.”
Baseball currently believes the total long-term debts for all McCourt entities funded by Dodgers revenue to be close to $600 million — not including the $150-million bankruptcy loan, according to a person familiar with the matter but not authorized to comment publicly.
The Dodgers did not respond to a request for clarification of their current debt status.
In case of a sale, McCourt would have to pay off taxes as well as debts. In July, McCourt told the divorce court that “a sale would result in … the incurrence of between $80 million and $200 million in tax liabilities.”
That tax bill could rise with penalties. In a divorce court filing in August, Frank McCourt’s accountant noted that the 2006, 2007 and 2008 tax returns for Frank and Jamie McCourt “as well as certain entities that allocate income to them” are currently being audited “by federal and state taxing authorities,” with any liability yet to be determined.
In an earlier divorce court filing, Jamie McCourt said the couple paid no federal or state taxes from 2004-09, on income of $108 million.
If the long-term debts funded by Dodgers revenue are $550 million, if the Dodgers exhaust their bankruptcy financing, and if a sale results in the maximum tax liability stated by Frank McCourt, then the team would need to sell for $900 million just for McCourt to break even.
The record sale price for a major league team is $845 million, set two years ago when the Chicago Cubs were sold by Tribune Co., which owns The Times and other media properties.
Forbes estimated the Dodgers’ value at $800 million last March, before a season in which attendance fell 17% and revenue dropped by roughly $27 million, according to a person familiar with the team’s finances.
Spokesmen for Frank and Jamie McCourt declined to comment for this story. Nonetheless, each of the McCourts believes a court-supervised auction could fetch a high bid in the range of $1.2 billion to $1.5 billion, according to the people familiar with their thinking, given that the incoming owner could negotiate a new television deal at perhaps three times that purchase price.
A prominent sports banker also cited those probable television riches in suggesting an auction price of $1.2 billion to $1.4 billion. The banker declined to be identified because he could represent potential bidders.
Andrew Zimbalist, a sports economist at Smith College, said he considered the $1.2-billion figure “too high.” Ganis, the industry consultant, estimated a $1-billion sale “plus or minus $100 million,” he said.
Major League Baseball believes the Dodgers could be sold for about $1 billion at auction, according to a person familiar with the thinking of MLB executives.
Yet, according to a person familiar with the Dodgers’ finances, a buyer might be hard-pressed to bid much more than $800 million, given the extensive renovations that would be necessary to maintain and upgrade a 50-year-old stadium. Indeed, in a Bankruptcy Court filing, MLB claimed McCourt had deferred $360 million in promised renovations to Dodger Stadium.
Whatever the specific numbers, the prospect of McCourt’s walking away from ownership with little or no money to show for it turns the conventional wisdom of sports economics on its head.
“It’s unusual. It’s not extraordinary,” Zimbalist said. “Teams don’t automatically sell for a gain. The common experience is the gain.”
McCourt has indicated in court papers that he plans to sue his former law firm for malpractice. If McCourt loses the Dodgers, he could allege the invalidation of a marital property agreement cost him the team, and he could sue for its value — or, if the team is community property, for half its value.
However, had he been willing to settle with MLB and sell the Dodgers before the bankruptcy, Ganis said McCourt probably would have walked away with hundreds of millions of dollars.
“I’m not sure he will walk away with very much cash — if any — today,” Ganis said. “The risk is much greater that he walks away with close to nothing.”