Oct. 24 (Bloomberg) -- The World Series will have just ended as a judicial Fall Classic may determine whether Major League Baseball Commissioner Bud Selig has complete power over the sport he has controlled for almost two decades.
In a hearing opening Oct. 31 in Wilmington, Delaware, U.S. Bankruptcy Court Judge Kevin Gross will hear arguments about whether Los Angeles Dodgers owner Frank McCourt can auction the TV rights to the team’s games or must sell the club, as Selig has requested.
In court filings and public statements, Selig, who is scheduled to testify, has called McCourt unfit to keep the franchise he bought for $421 million from Rupert Murdoch’s News Corp., which later propped him up with loans. McCourt, who will also take the stand, accuses Selig of selectively enforcing rules on owners.
Since the Dodgers’ Chapter 11 filing on June 27, the two sides charged each other with duplicitous acts, violations of league business rules, and misappropriation of the team’s lucrative TV rights. The conflict may call into doubt the “golden age of baseball” Selig, 77, says he has ushered in.
The Dodgers’ owner, who last week settled his divorce from ex-wife Jamie McCourt on undisclosed terms, is portrayed by baseball’s lawyers as a man who used the storied franchise as a “personal piggy bank.” A sports-business expert sees McCourt as less a villain than a symbol of how the sport has evolved as Selig’s ability to enforce or ignore rules has grown during his 19 years as commissioner.
“MLB gave so much power to Selig that some perceive a system with a lot of subjectivity and playing favorites,” said Marc Ganis, president of Sportscorp Ltd., which consults with teams in baseball and other sports on stadium and arena financing. “Whether or not that’s factual, it’s given Frank McCourt a basis to challenge MLB’s fairness in bankruptcy court.”
The Chicago-based consultant says Selig has the right to remove the owner, noting that the commissioner seven years ago supported his purchase even though the Boston parking lot operator’s finances didn’t meet the sport’s rules.
“This deal never would have been approved by the NFL or NBA, but McCourt can’t have it both ways,” said Ganis. “An owner knows he’s submitting to the powers of a commissioner.”
Selig has been granted enhanced powers as commissioner, according to Robert Manfred Jr., an executive vice president at the sport’s headquarters, and he has used them in the best interests of baseball, not any favored or disfavored interests.
“The rules are applied on an even-handed basis,” said Manfred, who was made available in Selig’s stead, because the commissioner can’t comment on matters that may be at issue in the hearing.
Selig’s tenure has seen robust growth by a number of measures. Twenty of 30 teams have built new ballparks. The league’s total revenue, fueled by TV rights, sponsorships and attendance, has grown six-fold to $7 billion a year, and the record sale price of a franchise has quadrupled to $845 million, for the Chicago Cubs in 2009.
Debt has also mushroomed, causing financial crises over the past 17 months in three of baseball’s four biggest markets. The Dodgers, Texas Rangers, who are playing the St. Louis Cardinals in the World Series, and New York Mets have buckled under cumulative borrowings exceeding $1.4 billion, with the first two teams filing for bankruptcy and the latter seeking a capital infusion.
Ganis says there are flaws in baseball’s debt-limit rules, which are based on a complex formula tied to teams’ cash flow and whose compliance is determined solely by the commissioner, unlike the National Football League. The NFL has a straightforward $150 million-a-team debt cap and requires owners to seek league permission for each bank loan.
Manfred says the nine-year-old debt rule continues to be amended and strengthened but that, overall, it has served the business of baseball well.
“The industry’s lenders and the clubs’ financial people believe the rule has been significant in maintaining financial stability,” said Manfred. He maintains the three teams’ troubles “all arise out of unique circumstances not related to their core business.”
The common thread of these teams’ woes is the confluence of the rising stakes of the baseball business, the declining economy, and the explosion of long-building pressure. At the center of it all is Allan H. Selig, who started out in baseball by suing it as part of a Milwaukee group’s unsuccessful 1965 effort to keep the Braves from moving to Atlanta.
Selig’s group bought the bankrupt Seattle Pilots for $10.8 million in 1970, renamed the relocated team the Milwaukee Brewers, and installed the auto dealer as principal owner. He co-wrote a 1982 rule that required teams to maintain a ratio of at least 60 percent equity to at most 40 percent debt, known as the 60/40 rule.
The Brewers often struggled to comply. A Wisconsin state legislative audit, which covered 1994 to 2003 and was occasioned by public displeasure over the Brewers’ taxpayer-financed $392 million stadium, found the Brewers didn’t meet the 60/40 standard in seven of those 10 years. The audit noted the rule’s enforcement was suspended from 1994 to 1998 by the acting commissioner, who was also the Brewers’ owner.
Selig became MLB’s acting commissioner in 1992, and was confirmed in the job in 1998. He then set up a blind trust for his stake in the Brewers, whose presidency passed to a daughter, Wendy Selig-Prieb, until the team’s 2005 sale for $223 million.
The Mets also have debt issues, which began in 2001, when real estate investor Fred Wilpon bought out former co-owner Nelson Doubleday with $138 million in borrowed money. A decade later, according to Bloomberg data, Wilpon had $375 million of team debt on the books and at least $617 million owed on Citi Field, which opened in 2009. (The latter doesn’t count as debt, under the rules established by baseball to restrict teams’ borrowings.)
Irving Picard, the trustee seeking recovery of losses by Bernard Madoff’s investors, filed a $1 billion clawback lawsuit last December, later scaled back by a judge to $386 million, against Wilpon and business partner Saul Katz. Picard says they drew on accounts with Madoff to help fund the team. Wilpon and Katz have denied Picard’s allegations and sought dismissal of the suit.
Selig approved a $25 million emergency loan to the Mets and has supported the team’s efforts to attract a capital infusion from a minority investor. Wilpon was appointed by Selig to baseball’s executive council and Peter Stamos, a partner of the owner in the Sterling Stamos Capital Management hedge fund, is chairman of the MLB Investment Advisory Board.
The Rangers stayed afloat through deft accounting and baseball’s forbearance in cracking down on former owner Tom Hicks’s debt-limit breaches. The team had negative equity going back to 2002, one year into the 10-year $252 million contract of infielder Alex Rodriguez, according to a lawsuit filed in August against Hicks by bankruptcy trustee Alan Jacobs.
According to the suit, Hicks put the parking lots and other real estate adjacent to his Arlington, Texas, stadium into a company called Ballpark Real Estate LLP. By shuttling Rangers-related revenue and debt between the two entities and a holding company, Hicks Sports Group, Hicks was able to pile up $525 million of debt, on which he defaulted in March 2009.
Manfred says Hicks’s debt excesses were at the holding-company level, beyond the reach of the sport’s ability to monitor and enforce the debt rule. He said baseball is negotiating with the players union, whose approval is required for debt-limit measures, to amend the rules so that owners can’t move debt from teams’ balance sheets to other entities.
Greg Bouris, a spokesman for the Major League Baseball Players Association, declined to comment.
Baseball required Hicks to sell the team, and favored a group co-led by Hall of Fame pitcher and team President Nolan Ryan over what a Rangers attorney called, in an e-mail to baseball lawyers, “a clearly economically superior” bid from Houston shipping magnate Jim Crane. The Rangers eventually went to Ryan’s entry after the Fort Worth, Texas, bankruptcy court organized an auction which delivered the team’s creditors an extra $100 million.
Nothing has raised more questions about baseball’s finances than the case of the Dodgers. Court documents show baseball violated its own 60/40 rule in 2004 by approving McCourt’s $421 million purchase of the Dodgers “entirely with borrowed funds,” according to a filing by baseball’s lawyers.
News Corp. Loans
In the course of McCourt’s Dodgers purchase, people familiar with the transaction say, Selig bowed to pressure from the team’s seller, News Corp. Its Fox Sports unit 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.
“There’s no doubt in my mind he will be a good owner of a very storied franchise,” Selig told reporters after McCourt was unanimously approved as owner of the club that broke Major League Baseball’s color barrier in 1947 when Jackie Robinson took the field as a Brooklyn Dodger.
The 2009 split of McCourt, 58, and wife Jamie, who was chief executive officer, touched off a financial crisis and made public their use of more than $180 million of Dodgers’ money, according to MLB, to pay for a lifestyle that included seven homes and a $10,000-a-month hairdresser. McCourt turned to Fox for assistance including, according to a divorce court filing, a $30 million loan in April 2011 secured by a malpractice claim against his former divorce attorneys.
That month, Selig installed a monitor to oversee the team’s operations and, in June, he refused to approve a new TV contract that would have given McCourt a cash infusion. The Dodgers filed for Chapter 11 protection from creditors in Delaware on June 27.
MLB has asked Judge Gross to end McCourt’s exclusive period to file a Dodgers reorganization plan, saying he’s proven his unfitness as owner and the Dodgers should be put up for sale. McCourt’s lawyers maintain the commissioner hasn’t acted in good faith with the Dodgers. Selig’s favored owners have gotten “velvet-glove treatment,” they say in court filings, while the Dodgers owner was shown “animus.”
McCourt’s lawyers lost a fight to get information on how Selig has handled television rights contracts with the other 29 teams. Gross ruled that the “good faith” question must be decided on how Selig handled McCourt’s proposed contract with Fox.
The business of the Dodgers has been rooted in the team’s broadcast rights since News Corp. bought the club in 1998. The purchase ensured Dodgers games would remain on Prime Ticket, a regional sports network of News Corp. unit Fox Sports, and out of the hands of a prospective competing network being discussed by Walt Disney Co.’s ESPN.
After ESPN scrapped its contemplated Southern California network, News Corp., facing the Dodgers’ persistent losses, put the team up for sale in 2003.
McCourt had shown interest, but not sufficient money, in earlier runs at team ownership. He dropped out of a $700 million auction for the Boston Red Sox that was won in 2002 by a Selig-favored group that hadn’t been the original high bidder.
No Money Down
He also wanted to bid for the Anaheim Angels in 2003, according to a person involved with the latter transaction, who asked not to be identified because of ongoing business relationships with MLB. This person says McCourt wanted to make a nothing-down offer for the Angels, eventually purchased by billboard magnate Arte Moreno for $180 million.
McCourt didn’t have much more cash on his third try, bidding for a Dodgers team considered more than twice as valuable as the Angels, according to Forbes.
He did have a quality News Corp. found attractive. Executives estimated he wouldn’t have the financial resources to wrest the Dodgers TV rights from Fox and start his own RSN, unlike another potential bidder, Los Angeles billionaire and philanthropist Eli Broad, according to a person who mulled a bid for the Dodgers, and is familiar with the abortive effort.
News Corp. wanted Broad and other bidders to agree not to sell the Dodgers’ TV rights to anyone else for 10 years and after that not offer them to such companies as Disney, Comcast Corp. and Time Warner Inc., this person says. McCourt extended the Fox network’s rights contract by 10 years upon assuming control of the Dodgers.
Lou D'Ermilio, a spokesman for Fox Sports in New York, said the company declined to comment.
Manfred declined to comment on the circumstances around McCourt’s purchase of the Dodgers.
Regional sports networks have produced extra money for teams, whether owned outright or as a source of advances from cable partners like Fox. Last year, according to Forbes, the YES Network, 34 percent owned by the New York Yankees, generated $400 million in revenue versus $325 million by the team proper.
As part of a $450 refinancing of SNY, a New York-based network two-thirds owned by the Mets, the team’s owners paid themselves a $160 million dividend.
In 2005, McCourt refinanced $250 million of debt taken on to buy the Dodgers through a unit of LA Real Estate LLC, created to make Dodger Stadium and 250 surrounding acres a separate entity.
Selig approved. “Over the past year, Frank McCourt has demonstrated his steadfast commitment to building a strong and healthy franchise in Los Angeles,” Selig said in a 2005 statement. “The success of this private placement is another example of Frank’s outstanding stewardship. It is good for the Dodgers and it is good for baseball.”
MLB provided a different assessment of the transaction in a July 14 bankruptcy court filing. “At his direction and without the consent of Major League Baseball, Mr. McCourt caused the Debtors to spin off key assets of the Dodgers (eg, the Dodger Stadium parking lots) to separate entities in an attempt to evade oversight and regulation by Major League Baseball.”
Manfred declined to comment on MLB’s divergent assessments of this financing vehicle, which made an additional $140 million debt placement in 2007.
The total $390 million worth of securitizations required about $32 million in annual debt service. Debt covenants also required McCourt, according to a Dodgers bankruptcy-court filing, to set aside “tens of millions of dollars” against the risk of a strike or lockout in 2012. McCourt had only reserved $17 million and faced a June 30 deadline to reserve more, along with an $18 million deposit for deferred player compensation and a $30 million Dodgers payroll to meet on that date.
As the day neared, MLB denied him the sort of emergency loan it had given the Mets, according to court filings. McCourt tried to extend his TV rights contract with Fox Sports, set to expire after the 2013 season, in return for a $385 million upfront payment. Selig refused, saying part of the money would go to paying down McCourt’s own debts, including his divorce settlement, not to relieve the Dodgers’ cash crunch.
“The proposed transaction continues to exacerbate your ongoing pattern of using club funds and club-generated revenues to pay for your personal needs and obligations,” Selig wrote in an 11-page letter to McCourt on June 20.
McCourt is asking the bankruptcy judge to end Fox’s current restriction against shopping the Dodgers’ TV contract to other bidders before December 2012 and to let the team put its broadcast rights up for auction. This would ensure the team’s future liquidity and make its creditors whole, he says. Fox has joined MLB in fighting the Dodgers’ proposal, filing a motion last month to block any auction.
The way Gross rules will have ramifications beyond the case at hand, said Thomas Salerno, who represented the National Hockey League’s Phoenix Coyotes in Chapter 11 proceedings.
“You have one side saying, ‘We are the king of baseball and nobody challenges our decisions,’ and another saying, ‘There’s a fundamental requirement in business for due process,’” says Salerno, a bankruptcy attorney at Squire Sanders & Dempsey in Phoenix. “The two sides are all in, and two things are sure. The loser will appeal and this is a black eye for baseball.”
The case is In re Los Angeles Dodgers LLC, 11-12010, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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