Friday, June 13, 2008

Sale of Cubs no 1-2-3 inning

For me when it comes to sports, the athletes are as interesting as the business itself. Of course I don't know the smaller aspects of the business such as attracting fans to the baseball park. Perhaps it's as much the field amenities and promotions as it is the athletes the fans pay to watch.

These past few months if you've been following politics the idea circulated that the state of Illinois was interested in buying Wrigley. The attempt to make this deal was partially to pad the pockets of Tribune Co. owner Sam Zell and to avoid the use of tax money to either buy the stadium or to make some needed renovations. The motive for this sale was said to be for Sam Zell to make as much money as possible. This is why there were several items in the news as far as selling the Cubs from Tribune Co.

One item was that he wanted to offer the field's naming rights for sale. Then the next item was for the Cubs and Wrigley field to be sold separately. Then of course was a possible sale to the state. Of course the state isn't really negotiating anymore.

Now the Tribune has more on the mechanics of a deal that will be a part of an impending sale of the Cubs to any interested party:
The difference in the Cubs situation, however, is that Zell is trying to pass muster with both the Internal Revenue Service and Major League Baseball, which has its own set of rules and requirements. That adds an extra level of complexity as potential new owners prepare preliminary bids due in early July.

Two sources said the documents peg the Cubs' 2007 cash flow at $31 million. Revenue, one said, is in the $250 million range. Given that experts have built expectations that Tribune Co. could fetch more than $1 billion for a package of the team, Wrigley Field and Tribune Co.'s 25 percent share of the Comcast SportsNet Chicago cable network, the first challenge is to devise a way to fund such a lofty price tag.

Added to the complexity is Zell's requirement that the transaction allow Chicago-based Tribune Co. to avoid as much tax liability as it can while "monetizing" the team. Even if the price ultimately falls below $1 billion, Tribune's capital-gains exposure from an outright sale would be enormous, analysts said. The company, which owns the Chicago Tribune, bought the Cubs in 1981 for $20.5 million.

Zell avoided capital-gains taxes in the Newsday transaction by creating what's known as a "leveraged partnership" to own the newspaper for the next 10 years. By taking a 3 percent stake in the partnership and assuming a type of exposure to the debt used to fund the deal, for IRS purposes Tribune Co. technically did not sell Newsday. Nevertheless, it received a $630 million cash payout it can use to pare down the $8.2 billion in debt incurred when Zell took the company private last year.

Robert Willens, a New York-based tax analyst, said one arcane complication in this structure is that in order to avoid triggering capital-gains taxes, the cash payout to the original owner cannot be larger than the liability it takes on as part of the deal. Also, the payout has to be funded by debt. Consequently, these deals tend to be heavy on borrowings to maximize the cash payout.

For the Cubs transaction, this could present a problem since Major League Baseball imposes limits on how much debt one of its franchises can carry. Sources close to the deal said the rules are complex, but for a team such as the Cubs, the debt ceiling might be in the range of 10 to 15 times cash flow. If the Cubs generate around $30 million in cash each year, that implies a debt level of less than $450 million, much less cash than Tribune would likely want to generate from the deal.

One way to generate a bigger payout would be to put additional debt on Wrigley Field and structure a similar tax-advantaged transaction for that asset. To make that work, Tribune Co. has suggested the new team owner submit to a preset 20-year lease that would provide cash flow to fund the Wrigley-related debt.
This is certainly worth reading if you're interested in the business side of sports.

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