Transaction Analysis: ... (02/11)
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February 11, 2013 BizballAre the Astros Really Losing Money?
Depending on what you read, clubs in Major League Baseball are either making a massive profit, breaking even, or, if you listen to the owners, often running in the red. Since baseball is a private industry, trying to determine the truth is a matter of educated guessing, wild hyperbole, or a case of “no comment” coming from the league and clubs. So when an owner talks about the financial status of the club he runs, it prompts a fair amount of discussion. As we’ve seen with the leaked financial documents from the likes of the Marlins and others, the truth typically is on the side of ownership not only making a profit, but a handsome one at that. The next chapter in this ongoing conversation comes via the Houston Astros and their owner, Jim Crane. Brian T. Smith of the Houston Chronicle tweeted on Saturday that Crane said, “As a franchise, [the] Houston Astros have lost money the last five seasons.” There are some very important semantics that need to be taken into account regarding that statement. The key word to latch onto is “franchise.” If you look at only the revenues and costs that the Astros themselves must cover, I can see very easily how Crane’s statement can be accurate. This includes only revenue streams attributed strictly to the club, such as gate receipts (attendance), television revenues (local/regional reached by the club), concessions, parking, suites, and other sources of that nature. In looking at player payroll and attendance in the final years of the Drayton McLane era and in the first year of Crane’s ownership, you’ll find that Crane has a good case. As he said upon purchasing the club, “The way we’ll approach it moving forward, and they’ve already started that, is get the payroll lined up with the revenue that’s coming in and continue to build our farm system. With the trades that have been made, we’ve got some very good prospects. I think you’ll see some more of that.” So, Crane was speaking about club-controlled revenues. In order for his statement to hold true in the aggregate, the Astros’ own losses would have to also exceed their revenues from national broadcast deals, MLB Advanced Media, and other league-wide sources, not to mention the revenue-sharing checks that the organization has recently collected. Once you account for all of that, you’ll notice that the Astros are actually pulling in a hefty sum: Centralized Revenue
The league’s national-television agreements with ESPN, FOX, and TBS are all set to expire in the near future, and when the newly reached deals kick in in 2014, that $711.7 million total haul will increase to $1.5 billion. According to a 2011 SportsBusiness Journal report, MLB Advanced Media revenues were $685 million annually. If we look at the leaked financial documents from the Marlins, we can make educated estimates for revenues from MLB Network and MLB Properties (merchandising), and also for revenue-sharing receipts. In 2009, the Marlins received a revenue-sharing boost of nearly $43 million; for the purposes of this analysis, we’ll be conservative and say that the Astros pulled in $15 million. Add all of that up and, based on these figures, the Astros would have over $63 million in revenues from centralized sources alone. So let’s say that’s it. What if there were a world in which only centralized revenues came into play, and as Crane said, the “franchise” was losing money? If we use the end-of-year payrolls for the 30 clubs provided by the Associated Press, for 2012 the Astros paid $81,139,621. This figure includes the amounts owed to every player on the 40-man roster, as well as salaries and pro-rated shares of signing bonuses, earned incentive bonuses, non-cash compensation, buyouts of unexercised options, and cash transactions. In some cases, parts of salaries that are deferred are discounted to reflect present-day values. Our projected centralized revenues for the Astros come to $63,356,667. Subtracting $81,139,621 would put the Astros at $17,782,954 in the red. But, once we throw in conservative estimates of revenues for which the Astros themselves account, that negative switches to a positive very quickly. Net Local Revenue
Now the picture becomes quite different. That $17,782,954 loss has become a $60,593,732 profit. The expiring television deal with FOX Sports Houston that the Astros saw end this past year pulled in $40 million annually. Attendance was 1,607,733 on the 2012 season, and, using the Team Marketing Report for 2012 (PDF), the average ticket price for the Astros was $30.09, so the franchise raked in more than $48 million in gate receipts. Since these are averages, we’ll fudge the numbers conservatively and subtract $10 million. That would mean net local revenues of $78,376,686—and remember, this doesn’t include radio, parking, suite, or concessions revenues, all of which could easily absorb our adjustment of $10 million. In fairness to the Astros, this is before any front-office salaries are deducted, and it also excludes various other expenses, such as minor-league salaries and the costs associated with international-scouting operations and academies. Still, it’s hard to foresee those additional costs adding up to more than $60.5 million and, as I mentioned, we’re excluding several key revenue streams that are difficult to derive from publicly available figures. And then there’s this: Beginning this year, the Astros will begin garnering revenues from CSN Houston, the regional sports network partnership between Comcast, the Astros, and the NBA’s Rockets. By the new agreement, the Astros own 46.384 percent of the new regional sports network, and they will see revenues from CSN Houston double to an average of $40 million when the season begins. So, with a projected Opening Day player payroll of between $25-$28 million, and all the associated revenues that the Astros will enjoy in 2013, the idea that Jim Crane will be repeating the “franchise lost money” comment made this year at this time in 2014 might best be described as laughable. Except for one notable caveat—a caveat that the league and clubs should avoid at all costs and that should not be allowed to adversely affect the fan experience. The stripping of payroll and rebuilding over the last five years had as much to do with Crane being able to purchase the club as it does with the Astros eventually fielding a competitive roster. According to the SportsBusiness Journal, Crane borrowed $220 million of the sale, on top of $55 million in loans from the league’s credit facility. There was also a $68 million loan (or a 10 percent stake in CSN Houston) issued from McLane to Crane to assist in him in closing the deal. This debt pay-down could be at the heart of the Astros’ financial troubles. But if there is one thing with which an MLB club should not burden its fans, it’s the complex, detrimental effect that being over-leveraged has on its ability to put a successful team on the field. The plan that general manager Jeff Luhnow has developed might make sense, but was the rebuilding process the best decision from a baseball perspective or one necessitated by fiscal restraints resulting from the sale? Clearly, the club is heavily debt-laden, and that raises the question of whether the Astros will be forced into their current non-competitive position until the debt is paid off. If so, then the follow-up question is whether it makes sense for the Astros to have been placed in such a highly-leveraged position in the first place. Given Crane’s well-publicized deep pockets—his net worth is reported to be $1.3 billion—one wonders why the new owner couldn't have covered the cost himself.
Maury Brown is an author of Baseball Prospectus.
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Is there anyway to tell how much of the debt has been written onto the franchise's books? Is it possible that Crane put that $220m loan on the Astros? Or even all $330m?
The Glazer family did that when pruchasing Manchester United so the Glazers, personally, had very little exposure to the risk while the club assumed nearly $1b in debt. (I'm not a finance guy, so forgive me if I've used some terms incorrectly.)
I would think that the Astros are the primary debtor but that Crane and his group made some personal guarantees.