To restore the glory of Dodger Blue, Magic Johnson and his partners will be shelling out a lot of green – maybe too much, sports economists say. And the biggest beneficiary of their largesse, aside from frustrated Dodgers fans perhaps, is a man who has run the franchise into bankruptcy, Frank McCourt.
Johnson is the most public face of a group of investors who won the Dodgers with a record-shattering total bid of $2.15 billion – reportedly all cash. The controlling owner will be Mark Walter, the CEO of Guggenheim Partners, a New York and Chicago-based private investment firm with $125 billion under management, according to its website. The ownership group, Guggenheim Baseball Management, also includes Peter Guber, a Hollywood heavyweight who is CEO of Mandalay Entertainment Group; Stan Kasten, the former Atlanta Braves and Washington Nationals president; Bobby Patton, who reportedly operates oil and gas properties; and Guggenheim Partners president Todd Boehly.
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Those who track sports business had expected the team to sell for much, much less – somewhere in the range of $1.3 billion to $1.6 billion, which still would have blown away the previous records for a sports franchise in the U.S., the $1.1 billion sale of the NFL’s Miami Dolphins. (The previous world record had been the $1.47 billion sale of the Manchester United soccer team in 2005.) The valuation math, according to sports economists, goes something like this:
Team prices are usually determined by applying a multiple of about 2.5 or three to a franchise’s trailing revenues, which for the Dodgers reportedly came to about $230 million last year. That brings the team’s value to between $575 million and $690 million. Then, factor in the major television deal that the Dodgers are expected to sign once their current deal expires after the 2013 season, or the regional sports network they could launch with cable partners. If that new deal – to be worked out at a time when the cost of such contracts has been soaring – brings in $200 million a year, compared with the current television revenue of about $50 million, the value of the team would rise to nearly $1.2 billion. Adding in the money the new owners could get from selling stadium-naming rights and other sources of revenue can bring the value close to or above $1.5 billion.
Even so, economists say that, at least right now, it’s harder to see how the price of the team soars above $2 billion. The new owners will also have to spend hundreds of millions to make costly renovations to the ballpark, and they may not have much flexibility to raise ticket prices if they want to keep attendance high.
Jon Heyman of CBS Sports notes that the winning group upped its offer from $1.5 billion ahead of an auction that had been scheduled for Wednesday. Other suitors reportedly included a group headed by hedge fund titan Steve Cohen and one led by Stan Kroenke, the owner of the NFL's St. Louis Rams. Those groups, Heyman says, stood firm in anticipation of the auction – which, in the end, never took place.
But with a thin market comprised of just three groups, each with their own idiosyncratic aims, the bidding was primed to be unpredictable, says sports economist Andrew Zimbalist of Smith College in Northampton, Mass. “When you have a market like that, just about anything can happen, and so just about anything did happen here,” he says.
The new owners “obviously assigned a strong vanity component to the value of the Dodgers,” Zimbalist adds – meaning their bid was about more than business. “If this is really about having the trophy of the Dodgers and not looked at as just a sound economic investment, then you can justify almost any price,” Zimbalist told The Fiscal Times. “If the investors are rich enough and they want to do something notable in their life and they’ve got assets worth billions and billions of dollars, then you can justify it. You could even justify a higher price, but on the grounds that what these guys are going to be reaping rather than some financial return is a lot of psychic return.”
In an interview with The Los Angeles Times, the new controlling partner insisted that “the market drove the price,” but also noted that he’s looking at the team as a long-term holding: "It's a multi-generational thing my daughters' granddaughters will own."
With the profit potential for the new owners still unclear, the big winner in the Dodgers deal may be outgoing owner Frank McCourt, who bought the team for $430 million in 2004. McCourt – called a “baseball bandit,” “the worst owner in the history of the Los Angeles Dodgers” and “one of the most crooked owners in sports history” – mired the team in debt and uncertainty, exacerbated by his very public, very ugly divorce battle. (The Dodgers said McCourt was unavailable for comment.)
Despite his bungling, McCourt stands to reap about $1 billion from the sale. (That’s after he pays the former Mrs. McCourt a guaranteed $131 million as part of their divorce settlement.) To top it all off, the new ownership group will still be partners with McCourt in a joint venture on the Chavez Ravine land surrounding Dodger Stadium – and could profit from future development of the area.
“It's problematic," Zimbalist told ESPN. "Here's a guy who borrowed practically all the money to buy the team for $430 million and now he's selling it for $2.15 billion and he's coming out with a healthy capital gain – it's repulsive. This is someone who doesn't deserve to walk away with a healthy profit after eight years of running the Dodgers in the most egregious, the most inefficient, the most self-interested, and the most vainglorious, idiotic way possible. It really is repulsive that he will still be making a profit in some way."
Then again, it’s as American as baseball and apple pie.
