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July 1, 2009 The Biz BeatThe Hundred Years War
I'll give Sam Zell of the Tribune Company this: the Cubs are just one of his many problems, and of all the mistakes he and the company have made, this repeatedly botched sale is actually one of the tamest. After all, compared to making a gigantic bet on the already-suffocating dead tree industry, losing a couple of hundred million dollars on a billion-dollar asset sale doesn't seem so bad. It has certainly been a very long road. TribCorp originally put the team up for sale in April of 2007, just after Zell used a leveraged buyout to take control of the company, and six months before the stock market peaked. The prospects were good; most experts predicted a ten-digit price tag, which would have been a first for Major League Baseball. But in the time since, the process has been filled with stop-and-go action, with reports circulating every few months that the Trib was close to picking a buyer, followed by an increasingly long negotiating period with winning bidder Tom Ricketts. While they've been waiting, both internal and external conditions have gone to hell. The housing bubble popped, credit evaporated, and the global economy tanked. The Tribune's business models, already on the ropes, finally became obsolete, as advertisers pulled money out of traditional media sources faster than even the most bearish pundits had thought. All roads led straight to bankruptcy court, where Zell and the Tribune are now trying to salvage whatever they can. Make no mistake, a deal will get done eventually. The Cubs are an extremely valuable non-strategic asset, and the Tribune's creditors and a bankruptcy judge will certainly see that the team is moved. You can also be sure that the eventual buyer, whether it's Ricketts or someone else, will be the one that's bringing the most cash. So after almost two and a half years and countless false starts, what's still holding things up? Here are the major issues still in play: Financing This is by far the biggest issue right now. The credit crisis has made big-ticket acquisitions far more costly than they would have been when the Tribune first put the Cubs up for sale in 2007, and it's the biggest reason the sale price has taken such a huge hit. The general economy has probably had an impact as well, but the Cubs' operations really shouldn't feel that much of an effect. Remember, all of the original bids were over $1 billion, and Mark Cuban was rumored to be at $1.3 billion at some point (although a large portion of that would have been an enormous ad deal with the Tribune, which is obviously way down on Zell's priority list at the moment). The Trib probably would have had to accept a slightly lower price/earnings multiple even if credit was still cheap, but the team's long-term value certainly hasn't declined by twenty percent. Neither has that of CSN Chicago, which the new owners will get a 25 percent stake in. Cable stations have been the media industry's rock in these tough times, since they bring in subscription fees along with ad revenue. The network could even get a huge boost down the road if the Cubs were to ever shift more of their games off of WGN. The Tribune, of course, has no interest in subsidizing a buyer's financing costs; for their purposes, they'd be better off selling to a buyer who can get better borrowing terms and, therefore, be able to put a higher value on the team. But if there was a bidder that was willing to pay the right price and had the money lined up, this deal would have been done already. Media Deals So what is Ricketts's approach? Predictably, he's looking for any area he can find to poke holes in the Cubs' franchise value, and he has decided on the team's media deals. Not a bad choice, actually, considering that virtually all of the team's current media contracts are with the Tribune, and are therefore set to max out value for the parent company. The Cubs haven't negotiated media deals as an independent company since 1981, when MLB's total revenue was annual $400 million-or about what the Yankees will do this year. That makes for a perfect straw man, since there aren't many direct precedents to point to. Ricketts is looking for one of two results: either the Tribune bumps up the rights fees that it pays for Cubs games on WGN, or it lowers the asking price for the team. (The team's deal with CSN Chicago will either stay the same or be renegotiated separately.) The problem is, both sides are more concerned with short-term issues, and won't want to budge on the sale price. Other Bidders Obviously, this maneuvering isn't sitting well with the Tribune. In response, the company is now taking the road-most-traveled, lining up a second bidder to put a little more heat on the Ricketts group. That bidder is thought to be Marc Utay, one of the original competitors that Ricketts had beaten out in January. If anything, this should actually speed things up a bit. Ricketts has had exclusive negotiating rights for the last five months, and there's still no sale. He has used that added leverage to fight for every dollar he can, and he's probably more than content to wait things out, figuring that credit conditions can only get better. But the Tribune doesn't have that kind of time. The company needs to unload the team as soon as it can, and this process is already two years over-baked. Having a little heat on Ricketts's back should help, as it at least tilts the scales slightly back in the Tribune's favor. Not that Utay really has a legitimate shot to get the team at this point. In reality, Ricketts will be the Cubs' next owner, barring a major collapse in his financing negotiations, or an equally major breakthrough in someone else's. But the Tribune-and its creditors, for that matter-don't really care who it is, as long as it's somebody, and soon. If you believe everything you read, a deal may finally be close. But then again, you'd also have some serious whiplash by now.
Shawn Hoffman is an author of Baseball Prospectus.
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Shawn, you wrote "You can also be sure that the eventual buyer, whether it's Ricketts or someone else, will be the one that's bringing the most cash."
I would bet $1.00 that Mark Cuban would bring more cash to a Cubs sale than Ricketts. But I would also bet $1.00 that Cuban does not end up owning the Cubs.
If you're right, how do you resolve that contradiction?
I actually wrote about this last summer on Squawking Baseball. Had Cuban really been the top bidder, the Tribune would have had a very tough time saying no given their situation, and not at least challenging baseball's bylaws in court.
But the thing is, Cuban wasn't actually the top bidder. His peak offer was reportedly $1.3 billion, with $500 million of that being a very long-term ad deal with the Tribune. When credit went from tight to impossibly tight last fall, Cuban fell off the map, and wasn't even a finalist.