the LA Dodgers’ bankruptcy: strange stuff

the occupational disease

The occupational disease of securities analysts is that they analyze everything.  For instance, I have a friend that I worked with over twenty years ago.  One day, she came to me at work and said she’d been counting the steps on the flights of stairs in the subway station near our office and found that each flight was 13 steps.  Wasn’t that a strange number, she said, and what did I make of it.

The notable thing about this exchange is that we both thought of it as perfectly normal.  I was flattered that she had asked me.

the Dodgers

It’s in this same vein of below-the-surface interest that I’m viewing the recent entry of the Los Angeles Dodgers into Chapter 11 bankruptcy.  I don’t see any way for me to make money–other than perhaps bar bets–from finding out what’s going on.   But I can’t help myself.

how a Chapter 11 filing usually works

The company in question has a lot of long-term debt outstanding, which is not being fully serviced.  Trade creditors are not being paid, either.  Trade creditors threaten to start bankruptcy proceedings in court as a way to force long-term creditors to pay them off.  At some point, the long-term creditors get fed up at being nickeled and dimed to death and allow the bankruptcy to occur.

Management stays in place.  Long-term debt holders trade some portion (maybe all) of their debt for 100% of the equity in the firm that emerges from the proceeding.  Equity holders are wiped out; they receive nothing.  Trade creditors may or may not get paid, depending on the circumstances.

the Dodgers’ court case

I’ve glanced through the court papers. They don’t say a lot.

–They indicate that five interlinked companies are filing for bankruptcy together.  The names suggest that the overall ownership structure is complex and involves both corporations and partnerships.

–They also indicate that the Dodgers have a working capital problem and aren’t able to meet the June 30th payroll, either through the club’s cash flow or through borrowing.

–Secured creditors are not listed in the filing, only unsecured ones, like former ballplayers who agreed to deferred compensation (Manny Ramirez, at $20 million, is owed the most).

–The only thing the McCourt camp says about the overall debt situation is that it believes the filers have more than enough assets to satisfy secured creditors; total assets are $500 million-$1 billion; total liabilities are under $500 million.

What else do we know?

1.  According to the Los Angeles Times, Fox Sports has offered the Dodgers $1.6 billion for the right to broadcast Dodgers games for thirteen years after the current contract (also with Fox) expires in 2013.  A reasonable first approximation (read: good guess) is that the present value of the proposed contract is $800 million.  That’s just about the entire asset value of the baseball franchise.

Fox reportedly was willing to advance about half that amount (the numbers being reported vary) to McCourt/Dodgers.  Major League Baseball, whose approval was needed, rejected the deal as not being in the best interests of baseball.  Reportedly, this was because about half the advance would have been paid directly to Mr. McCourt to settle personal debts, leaving the Dodgers in a deeper hole than before.

2.  The Dodgers were unable to get a working capital loan from a bank.  The club was quickly able to line up $150 million in financing from a JP Morgan hedge fund once it was in Chapter 11, however.

The issue here is that in Chapter 11 unsecured creditors go the bottom of the list of entities to be repaid–and therefore may not get back a penny of what they’ve lent.  This suggests to me that the Dodgers had no unencumbered assets to use as collateral for a loan and that potential lenders who saw the club’s financials suspected that a Chapter 11 filing was imminent.

One possible explanation is being offered by Dodger Divorce, a blog written by Josh Fisher, an ESPN correspondent.  In his June 21st post, titled Mechanics, Mr. Fisher says basically that the revenue from parking at the stadium and from non-premium ticket sales go to other parts of the McCourt empire and not to the Dodgers.  Fisher estimates this cash flow to be about $80 million a year.

One other thing:  the interest rate the Dodgers negotiated for the financing is staggeringly high.    The simplified version:  $15 million in interest yearly, plus the Dodgers must pay back $150 million, even though they’ll only get about $143 million.

3.  Bankruptcy–in which equity holders virtually always lose everything–was Mr. McCourt’s best option.  That says something, doesn’t it?

One thing Chapter 11 accomplishes is to freeze litigation between McCourt and his wife over who owns the club.  And it may make that whole question moot, since Chapter 11 may well disenfranchise both.

At the same time, the bankruptcy allows McCourt to reopen the possibility of sale of Dodgers’ broadcasting rights.  It’s hard to imagine that the court would allow any money to be diverted for anyone’s personal use, though.  But who knows.

Stay tuned.  The court proceedings should be very entertaining.

one odd figure catches my eye

The obvious point of comparison is with another woefully managed franchise, the Mets.  In contrast to the Dodgers, the Mets have agreed to turn over the running of the franchise to professional baseball people and are negotiating to sell part of the team to replace what they lost by using Bernie Madoff to manage their money.

If I recall correctly, the Mets baseball team receives $60 million a year for broadcasting rights from SNY, the cable venture that the Wilpons own a share in.  But Fox is apparently offering the Dodgers more than double that for broadcasting rights to Dodgers games.  Hmm.



the Mets’ financial problems: lessons for stock market investors

I’m writing this on Saturday morning, just before heading out to see a Mets spring training game in Florida.

the Mets

Yesterday’s New York Times has a front-page article (I’ve tried to link the article but I’m sending this from a Starbucks and I’m finding the NYT search function is awful!  Sorry.  3/28:  here it is.) detailing the Mets’ current financial troubles. It states that the Mets lost $10 million in 2009 and $50 million in 2010. The paper expects the club to lose another $50 million in 2011. My guess is that this last figure will prove much too low.

Another aspect of the Mets’ bottom line is that the losses come after including the yearly payment to the club of $60 million for broadcast rights to games. That payment comes from the cable network SNY, which is also owned by the Wilpon family. Whether the figure represents a subsidy to the Mets or a shifting of value away from the club isn’t clear to me. The only figure I have for comparison is the one from the $1 billion lawsuit filed against the Mets by the Madoff trustee. The court papers say the Mets bought back broadcast rights from Cablevision in 2003 for under $10 million a year.

Where does the NYT‘s information come from? The article doesn’t say, but I presume the source is one or more of the approximately half-dozen parties now poring over the Mets’ financials in preparation for possible bids to buy a stake in the baseball team.

According to the article, current ownership’s projections call for the team to be back in the black by a healthy amount by 2015. To me, that sharp reversal of current form would be a prodigious feat of management skill, even if the Madoff litigation weren’t hanging over the club.

As a life-long Mets fan, I feel a horrible temptation to begin a litany of the shortcomings I perceive in the way the Mets have been managed over the past decade. But that’s not my point, and the ballgame is calling.

My post of a year ago

About a year ago, I wrote a post about the Mets, saying I believed they were in far deeper financial difficulty than was commonly thought. I had assembled some figures, like the Mets’ payroll, ticket sales and concession revenue. I knew something about the interest and principal payments due on the bonds issued to finance CitiField construction. But getting hold of the bond offering documents, which aren’t easy to find, proved beyond me. And, of course, I didn’t have anything like the data that prospective bidders are being furnished with. Also, I’m basically a lazy person when no money is on the line.

Why was I convinced that the Mets had financial troubles? The club’s behavior had changed—in a way that was totally at odds with their previous behavior but was entirely consistent with the hypothesis that the club faced a serious revenue shortfall.

IThe Mets had made a trademark of spending lavishly on free-agent baseball talent. They didn’t always spend wisely, as $24 million for Luis Castillo or $39 million for Oliver Perez will attest to, but they always spent a lot. Two off-seasons ago, however, the club altered that behavior drastically. Yes, the Mets did sign Jason Bay. But despite the fact they desperately needed pitching, they ignored all the available pitchers. That may have been the prudent way to go, but my point is that the Wilpons had never acted that way before.

Time passed. The club’s pitching woes worsened. Yet the Mets were reluctant to pursue pitchers whose price tags would be less than $1 million in yearly salary. These may not have been the best arms in baseball, but they were better than what the Mets had on the roster. There were also leaks of the Wilpons’ dissatisfaction with the performance then general manager Omar Minaya, whom the Mets were supposedly reluctant to let go because he had a $3 million buyout clause in his contract (if these sories are true, and the Wilpons’ evaluation of Mr. Minaya were accurate, then the decision to keep him on the payroll for another year was lunatic, but that’s another story).

Significance for stock market investors

If you watch companies carefully enough, you’ll discover that they have personalities, just like individual people do. There are some actions you come to expect of a management team, and some that you’ll come to think are completely out of character.

I think this kind of qualitative observation is extremely important to do, especially for growth companies. While a company acts within what you understand its personality to be, you get little data other than more confidence that you have typed the firm correctly.

But when a company acts out of character, you almost always have very significant information. And you have it—positive or negative—far in advance of when the reasons for the change become apparent in the company’s financial results.

If you can put yourself in the place of the company’s CEO and ask yourself, “Why would I be doing this?”, you will in all likelihood get insights into corporate strategy—and therefore into potential earnings surprises—far ahead of Wall Street analysts who are focusing mostly on what results will be over the coming three months. This will give you time to either add to positions or exit gracefully before reported earnings make the new state of affairs evident to all.