Wednesday, January 21, 2009

Chicago Cubs Economy

If it's not hockey I take a great interest in it's baseball assuming that I can sit at home to watch almost three hours of balls, strikes, double plays, and other assorted events in baseball. I also am intently following the sale of the Chicago Cubs. I understand that the sale might be announced this week.

However, let's see what Forbes has to say about the Cubs:
The Tribune Company is to announce the buyer of the Chicago Cubs baseball team this week. The short list is Chicago businessman Tom Ricketts, Chicago real estate investor Hersch Klaff and New York private-equity investor Marc Utay, according to a reporter at the Chicago Tribune, who must have, um, pretty good sources. Hope (or is it a goat) springs eternal for Cubs fans, now 100 years since a championship.

The only reason I bring this up is that Mark Cuban, famous hedger of Yahoo! shares after selling his company, owner of the Dallas Mavericks basketball team, frequent finee by NBA commissioner David Stern (another $25,000 last week!) explained a couple of weeks ago on his terrific site, why he wasn't a finalist for the Cubs. Inadvertently, or maybe blatantly, he gives the greatest explanation of today's asset values and what has gone wrong with the U.S. economy.

"I never thought it conceivable that it would be hard to spend a billion dollars on a sports team. In this case it was. Add me to the list of people who never want to participate in this type of sales process again. I tried every trick I knew to try to get them to commit to me. ... You name the trial close, I went for it. But I couldn't close them."
So Cuban isn't going to own the Chicago Cubs? :(

Well not surprised because this has been rumored for a while now. Yeah there is a credit crunch that is hampering the sale of the Cubs in addition to Sam Zell's willingness to maximize his own profits. That drive of course is said to cause him to have more of an ownership stake than he would like. Especially since there is a credit crunch.

Here's more:
So, and here's where I differ with Mark, if you pay $1 billion, my guess is that it's more of a trophy than a business. I doubt it made all that much economic sense as a multiple of cash flow and profits. The greater fool theory is invoked. Like that stretch house--make the payments and hope it's worth more in five years and someone else will pay you more.

Cuban goes on: "Then the credit crisis hit and hit hard."

Oops. My guess is no bank would be willing to lend against existing cash flows, and it would be hard to increase cash flows.

"All of the sudden, what seemed like a sane business decision, didn't seem so sane any longer." The sanity being the banks taking most of the risk? "In particular, the financial participations I had been discussing with my bankers were for shorter-term loans. Just refinance at the end of the term ... except it no longer seemed like a safe bet that I could refinance in a few years ... for better or worse, the banks were getting worried about staying in business and the idea of matching the asset to the term wasn't something they were ready to do ..." Meaning the Cubs were going to be around for another 100 years, so how about at least a 10 or 20-year term on the loan.

So, fair to say, the Cubs are no longer worth $1 billion. Same team, same cash flows, more or less. Yeah, advertising will be down, but not by that much. It's just that without financing, the same identical underlying asset is worth much less!
It hit me that there is still an opportunity for Cuban to own the Cubs. I don't think it's outlined in the piece, however, one way to own a baseball team is to latch onto an ownership group looking for partners. If Cuban is lucky he might be able to outright but the team from his fellow partners. Of course that could take some time.

Onto the last paragraph of this piece...
Something will get the Cubs, er, the economy back towards the World Series--an opposite field hitter, speed on the bases, long relief, who knows. Will it take a stimulus package/New York Yankees $209 million payroll? I doubt it. The trick is to get as quickly as possible to rational pricing. What is something worth with normalized profits and cash flow? That's what forms market bottoms and gets bankers lending again. If someone overpays for the Cubs now, Mark Cuban may have another chance at them.
I still hope Cuban can get the Cubs. The odds against involve the resistance of Major League Baseball. I see Cuban as a proven winner, even if he wasn't able to bring an NBA title to Dallas. He can build a winner, and probably bring more crowds to Wrigley Field.

Well we'll see. I eagerly await a change in team ownership with hopes that perhaps the Cubs will make it to a World Series!

Via Instapundit

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