March 19, 2012

Bizball

From Magic to Cohen and More: Handicapping the Bidders for the Dodgers

by Maury Brown

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That which does not kill us makes us stronger. – Friedrich Nietzsche

Who knows how many fans of the Los Angeles Dodgers prescribe to Nietzsche’s well-worn quote, but it’s a fervent prayer for baseball and certainly for many who are watching the bankruptcy sale of the club. The Dodgers are more than just some random club; they are a cornerstone of the league’s history.

By the end of April—with the parking lots around Dodger Stadium the possible exception (and that’s still an “if” at this stage)—the McCourt era will be over—an embarrassing foray into overindulgence that hurt not only the club but Major League Baseball (“How could the ‘Dodgers’ fall into bankruptcy?!?”). In fact, McCourt’s highly-leveraged $430 million purchase in 2004—in the age of the blossoming television rights market—will look so incredibly puny as to be comical. By the end of April, the Dodgers will sell for over three times that amount; it'll be the highest amount ever paid for a North American sports franchise, surpassing the $1.1 billion sale of the Miami Dolphins to Stephen Ross.

There are four groups left in play for the purchase of the club. Each has strengths and weaknesses, and not all facets of a bid are weighted equally. Here is how the handicapping of the field breaks down:

Magic/Kasten
This group includes former Laker star Magic Johnson; former Washington Nationals president Stan Kasten who, prior to that gig, was also president of the Atlanta Braves, Thrashers, and Hawks simultaneously; Golden State Warriors co-owner Pete Guber, who is also the chairman and chief executive of Mandalay Entertainment, which is invested in the successful Dayton Dragons minor league team; and Mark Walter, the CEO of Guggenheim Partners, the private global financial services firm.

Strengths: While Magic Johnson may be on the masthead, in most circles and reports, the name of the group is going by Magic/Kasten. That’s no mistake. In terms of operational excellence, having Stan Kasten sitting with Magic makes transitioning to new ownership a smooth ride. Remember, Kasten ferried the transition of Atlanta’s Olympic Stadium into what is now Turner Field, and then did likewise for the Lerners with Nationals Park. He’s well-versed in dealing with the public (ask anyone in the media about “Stan speak”) and adds credibility.

Shortly after bid details began leaking, Johnson added Guber to the mix. This was done for two reasons: 1) It gives the group more cash equity to put into the bid (which is one of, if not the most important, facet of the bid structure) and 2) Guber has exceptional marketing and brand-building credentials through Mandalay Entertainment.

For his part, Johnson is an icon in the Los Angeles area and beyond. A short trip down Memory Lane will remind you that civic leaders were never thrilled with having Bostonian Frank McCourt own the Dodgers. Magic is LA. Throw Guggenheim Partners into the mix (valued at over $100 billion) and you have an exceptionally solid group.

To date, the Magic/Kasten group has the highest bid on the table at $1.6 billion. Oh, and there’s this: If Magic winds up owning the Dodgers, he’d become MLB’s first ever African-American majority owner.

Weaknesses: Cash. That’s basically it. While the Magic/Kasten group has that highest bid at $1.6 billion, it’s unclear how much of its structure has cash in it. That’s playing into the hands of rival bidder Steven Cohen, who has an astonishing $900 million in cash equity in the deal. According to the New York Post, that aspect has MLB leaning in favor of Cohen, although McCourt is reportedly favoring Magic/Kasten.

Cohen
Steven Cohen is a hedge fund magnate and billionaire who has partnered with super-agent Arn Tellem. Cohen has reportedly also added former MLB manager Tony La Russa and former MLB Deputy Commissioner Steven Greenberg (who could wind up in the position of president). Late Sunday, word broke that Patrick Soon-Shoing, the richest man in LA, has joined Cohen’s group.

Strengths: Cash. Lots of it. While Cohen’s bid was reported to be $200 million lower than the Magic/Kasten bid, the structure, with its $900 million in cash, is a leg up on the competition and is driving other groups to meet the lofty figure. Throwing in Soon-Shoing makes the group practically an impenetrable fortress in the cash department. The bankruptcy court will love seeing a large sum of cash in the winning bid, but Cohen’s is so high (to place just the cash in perspective, the sale of the Cubs at $845 million is currently the highest amount ever paid for an MLB club, meaning Cohen could simply cut a check and have money to spare) that MLB is most interested in its offer. The reasoning is simple: With that much cash, there’s no need to leverage the impending media rights deal for the Dodgers. That revenue would go straight back into the Dodgers.

The late add of Steve Greenberg, who is currently with Allen and Co., clearly was done to bring in operational experience. Arn Tellem might be best looked at as a “push.” He knows player talent, which could assist a GM, but the other side of the coin reminds one of Jeff Moorad and the squeamish attitude that some owners have had in approving him as controlling owner of the Padres. There is still that old guard in MLB’s ownership ranks. Having a player agent high up the ownership ranks may not sit well with everyone. In terms of investments back into the club, according to Bill Shaikin’s LA Times report, “Cohen last fall retained Populous, a prominent sports architecture firm, to recommend improvements to Dodger Stadium. Cohen is prepared to commit close to $2 billion to buy the Dodgers and renovate their stadium without financing any of that amount, according to a person familiar with the sale process.”

Weaknesses: Cohen, a hedge-fund magnate, has been somewhat controversial. His SAC Capital was investigated last year for insider trading in a $15 billion bio-tech takeover. All told, Cohen and SAC Capital were part of 18 trades flagged by SEC regulators between 2002 and 2010. That may be just part of being a big player in the hedge fund market, but one thing is clear: Cohen is not “LA.” He grew up in Great Neck, New York, has been part of Wall Street, and has shown interest in purchasing the Mets. From an operational perspective, only the addition of Greenberg has any sense of raising Cohen’s group to a level of being able to transition the Dodgers quickly from McCourt quagmire to a pillar of MLB. No offense to Mr. La Russa, but the idea that he could add greatly to the front office would be like saying MLB players make strong GMs. Just because you’re a dugout manager does not make you someone that knows the ins and outs of running a franchise from a high-level executive position. La Russa strikes one as nothing more than a high-profile name to add to the group rather than one that actually strengthens the bid.

Stan Kroenke
Kroenke owns Kroenke Sports Enterprises, which includes the Denver Nuggets of the NBA, the Colorado Rapids of Major League Soccer, the Colorado Avalanche of the NHL, the Colorado Mammoth of the National Lacrosse League, and the St. Louis Rams of the NFL (the Colorado sports properties are in the name of Josh Kroenke, one of his children, to satisfy NFL ownership restrictions that forbid a team owner from owning teams in other markets). He is also the majority shareholder of English football club Arsenal.

Strengths: If Kasten knows how to run clubs from the president position, Kroenke knows how to own them. As his resume shows, he’s got his fingers in every one of the big four sports leagues in North America, sans MLB. That diversification can be of assistance at times (ask Mike Illitch and Jerry Reinsdorf). If his family background means anything, he’s always been tied to baseball, even in the womb. He was named after St. Louis Cardinals Hall of Famers Enos Slaughter and Stan Musial. Forbes estimates his net worth to be $3.2 billion, as of last year. Having a large number of sports properties under his wing also makes creating a regional sports network easier.

Weaknesses: With so much talk of the NFL looking to get back into Los Angeles, having Kroenke in the “final four” of the bidders adds another dimension to the sports landscape. Roger Goodell may be tickled, but MLB’s owners could be uncomfortable with the cross-league dynamic being such a large issue hanging over a club sale. To add, Kroenke’s initial bid was approximately $1.3 billion with no word on how much cash equity is in the deal. Add in that there has been nothing on who he has slated operationally to run the club, and Kroenke appears to be somewhat behind Magic and Cohen.

The partnership of Michael Heisley and Tony Ressler
Heisely owns the NBA’s Memphis Grizzlies while Ressler is the Ares Capital co-founder and a minority investor in the Milwaukee Brewers. Should Ressler become a co-owner in the Dodgers, he would have to divest his interest in the Brewers.

Strengths: Like Kroenke, Heisely has ownership experience with the Grizzles, while Ressler gives strength through minority ownership of the Brewers—an organization that gets high marks in nearly every facet. Total assets of Ares is reported to be $40 billion. The two together reportedly have a bid of approximately $1.3 billion submitted. It’s not known in the media what amount of cash equity is in the bid. A big advantage could be sports properties that would comprise a regional sports network with the Dodgers.

Weaknesses: Cohen is really pushing the bidders forward to bring more cash into the bids, but when you consider that Heisley and Ressler (as with Kroenke) are $100 million below Cohen and $300 million below Magic in total offering, the cash piece becomes even more critical. To make the deal happen, Heisley could sell the Grizzlies if Oracle founder and CEO Larry Ellison is interested. If that happens, Heisley moves this aspect out of the “weaknesses” category. As reported by the LA Times, if the transaction to Ellison were to occur and the Grizzlies were moved to Anaheim, you would have all the pieces in place for an RSN.

And the winner is…
The race is really coming down to two groups in Magic/Kasten and Cohen. The distance for the other two, along with cross-ownership concerns, is likely enough to move Kroenke and Heisley/Ressler out of the picture. As a result, it seems as though it’s going to boil down to the bankruptcy court and Frank McCourt.

McCourt has a chance to go out a winner in selecting the Magic/Kasten group. While the cash piece is critical, unless it is so far out of skew as to not be competitive, it would be smart to take the goodwill and operational excellence that comes with Magic/Kasten, which is head and shoulders above the others in this regard. By the same token, if the deal is structured closely to Cohen’s, MLB needs to push for the same. There’s every reason to want the Magic/Kasten group in place, and who knows? If the Mets continue to slide into the abyss, the league might be able to have their cake and eat it too. Magic/Kasten could own the Dodgers and Cohen could land his more favored Mets.

But in the end, the cash really does matter. To date, the amount of cash equity in the Magic/Kasten offer has not surfaced, and there’s been plenty of talk about how the $900 million in the Cohen deal is very real. Plus, adding in Soon-Shoing has to be seen as a matter of making the other groups cry, “Uncle.” You just can’t see a scenario where any of the groups could mount an effort that would result in Cohen’s group being beaten in terms of cash equity. If McCourt doesn’t move toward Cohen on his own, the courts could steer him in that direction. Taking everything into consideration, an ever so slight edge is going to Cohen winning the day. While it may not be the best ownership group at the moment, the group does seem the most likely to be destined for a win. In that, Magic/Kasten could have by far the best winning—yet losing—group in the mix.

Maury Brown is an author of Baseball Prospectus. 
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