UPDATE: Major League Baseball has announced that it has rejected the proposed TV deal between the Dodgers and Fox. The reasons given by MLB include many of those stated below: the deal is not in the best interests of baseball, it diverts too much money away from the Dodgers and to the McCourts and their proposed divorce settlement, it mortgages the future of the franchise, and so forth. Keep an eye on DodgerDivorce.com for a complete analysis. Also, please comment below if you’d like to see more here at IIATMS on the Dodger situation.
This information in this piece was compiled with the assistance of Josh Fisher at DodgerDivorce.com, though the conclusions here are mine and not Josh’s. Josh is one of the great guys on the baseball internet, and if you’re interested in the saga of the Dodgers and Frank McCourt, you should make Josh’s site a must visit.
Over the next two weeks, Bud Selig will face the defining moment of his career as Commissioner of Major League Baseball. Selig can approve a proposed contract between Fox Television and the Los Angeles Dodgers, effectively allowing Frank McCourt to continue to run the team. Or Selig can veto the deal, initiating what should be an ugly court battle with McCourt over who controls the Dodgers’ franchise.
Here’s the situation in a nutshell: the Dodgers have a tentative agreement in place with Fox, where Fox would pay something like $3 billion in exchange for the TV rights to Dodgers games for the next 17 years (though there’s some dispute that the deal is this rich). The Fox deal includes a $385 million “loan” to the Dodgers, with a bit more than $200 million of this loan going to the Dodgers, $80 million going to pay down unspecified indebtedness, and the remaining $93.5 million going to the McCourts individually or to the cost of a proposed settlement of Frank McCourt’s divorce case with his ex-wife Jamie. If baseball approves the Fox agreement, then the proposed settlement would require a one-day trial in August before Superior Court Judge Scott Gordon to determine if Frank McCourt owns the team outright, or if the team is community property and must be sold. If baseball rejects the Fox deal, then Frank and Jamie McCourt’s proposed divorce settlement is nullified, we’re back to square one, and we’re in for an orgy of litigation.
There is no doubt: Commissioner Selig should reject the Dodgers-Fox contract, seize control of the Dodgers, and sell the team to a responsible owner who will (with the grateful help of millions of my fellow left coasters) restore the team to its former greatness. Selig must act to prevent Frank McCourt from continuing to plunder the team. Selig must act before the team is saddled with even greater debt, while the team’s reputation can still be salvaged and the team is still marketable to a worthy owner.
The issues involved extend beyond the Dodgers, and affect everyone in baseball, including the Yankees. What’s at stake is whether baseball’s Commissioner can protect the “best interests of baseball” against the determined opposition of an individual and greedy owner. What’s at stake is whether the Commissioner can act to prevent a single owner from bringing chaos to a flagship franchise, before that franchise is stripped of all value and the cost of restoring order becomes so prohibitive that the Yankees and the other teams in baseball would have to foot the bill.
My case for the termination of the ownership of Frank McCourt follows after the jump.
If you don’t closely follow events west of the Rockies (or west of the Hudson), here are the basic facts about McCourt’s ownership of the Dodgers. McCourt bought the Dodgers from News Corp (Fox Sports) with $150 million he borrowed from Bank of America, $75 million he borrowed from Major League Baseball (MLB) and a $196 million debt package from Fox. That’s $421 million of debt.
After the purchase, McCourt rearranged this debt to his liking. McCourt traded his Boston parking lots to Fox in exchange for forgiveness of some of the Fox debt. Then he caused a Dodger affiliate, Dodger Tickets, LLC, to borrow $250 million to refinance most of the remaining acquisition debt. Plus McCourt cashed in on $50 million of “rebates” from Fox. With this rearrangement, McCourt effectively purchased the Dodgers – for a final purchase price of between $355 million and $371 million – in exchange for parking lots and $300 million (more or less) of debt. By all reports, McCourt put not one dime of his own into this purchase. Moreover, McCourt did not himself have to borrow the money used for the purchase – he got the Dodgers to do it for him.
It’s been frequently reported that McCourt “bought the Dodgers on a credit card”. That’s only half the story. The other half of the story, the more important half, is that McCourt bought the Dodgers on the Dodgers’ credit card.
Once McCourt had control of the Dodgers’ credit card, he continued to use it, this time to finance his family’s cost of living. Then Dodgers’ Executive Vice President Jeff Ingram (now team Vice Chairman) testified that the Dodgers built their team budgets around the personal cash demands made by the McCourts – from a financial standpoint, the team’s top priority was to raise the funds required by the McCourt family. Ingram described it like this: the “family and business checkbooks were largely one and the same.” Ingram actually testified that the family used the team like a “credit card”.
In an email disclosed in Jamie McCourt’s divorce filings, Ingram describes Jamie McCourt’s attitude towards the Dodgers as follows: “why have a family business but to support the family lifestyle.” Remember, Jamie McCourt was the team’s CEO. Jamie McCourt had the power to reach for the Dodgers’ checkbook and sign the checks herself.
How did the Dodgers manage to fund the McCourt lifestyle? Let’s start with salaries: Jamie McCourt received up to $2 million annually for her services as Dodgers’ CEO. Frank McCourt received up to $5 million annually from one or more businesses affiliated with the Dodgers. The Dodgers also paid up to $600,000 in annual salary to two of the McCourt children, one of whom was attending Stanford University and the other of whom had a full-time job at Goldman Sachs.
But $7.6 million a year was not nearly enough money to meet the needs (estimated at over $2 million a month) of the McCourt family. The McCourts spent money at a rate that turned heads, even in Los Angeles. Best known is the McCourt appetite for real estate. After buying the team, the McCourts proceeded to buy four homes in Los Angeles – two in Malibu, two near the Playboy Mansion – at a combined cost of around $89 million. This figure includes the estimated cost of McCourt “improvements” to these homes, including a roughly $14 million bill for tearing out tennis courts at one property and replacing them with a swimming pool. Then there were the other expenses: the vacation properties, the private jet, the private drivers, the hairdresser who worked exclusively for the McCourts five days a week … the list goes on and on. Here’s an expense that’s one of my personal favorites: over one 18-month period, Jamie McCourt paid over $100,000 to various florists, and charged the Dodgers for the expense.
The McCourt lifestyle unraveled when Frank McCourt fired his wife as Dodgers’ CEO, claiming that Jamie McCourt was having an affair with her driver. (Naturally, the driver’s salary was being paid by the Dodgers; Frank McCourt has alleged that his ex-wife and her driver spent 2½ weeks together on vacation in France, with the Dodgers once again paying the tab.) In turn, Jamie McCourt filed for divorce, and claimed half ownership of the team. But the McCourt’s wild spending did not stop with the divorce filing. Despite the McCourts’ owning four homes in Los Angeles, Frank McCourt currently lives in a suite in the newest luxury hotel in Beverly Hills, at a cost north of $30,000 a month. Meanwhile, Jamie McCourt reportedly uses one of the McCourt’s multi-million dollar homes “exclusively for swimming”, while a second is used to store furniture. Plus each McCourt has hired floor-fulls of lawyers and accountants to fight the divorce. Remember: the Dodgers are ultimately paying for all this, because neither McCourt has any other source of income.
How much have the McCourts managed to extract from the Dodgers? Well, if we ignore the debt the Dodgers took on so that the McCourts could buy the Dodgers but include the McCourt salaries, the McCourts have withdrawn from the Dodgers anywhere from $109 million (Frank McCourt’s estimate) to $141 million (Jamie McCourt’s estimate). The truth is, the real amount the McCourts plundered from the Dodgers may be more than $141 million – at the moment, all we have to go on is what each McCourt has been willing to admit to.
(In case you were wondering, during their ownership of the Dodgers the McCourts have paid not one penny in income tax.)
How have the McCourts managed to extract money from the Dodgers in addition to their salaries? The Dodgers do not earn enough money after expenses (including revenue sharing) to pay for all this (particularly since the Dodgers must ultimately fund the interest payments on the debt borrowed by the McCourt enterprises). Once again the McCourts made use of the Dodgers’ “credit card”. Whatever money the McCourts needed, the Dodgers borrowed for them. To facilitate this borrowing, Frank McCourt blew up the Dodgers into 20-odd separate businesses. The Dodgers’ organization chart looks like this:
The Dodgers team is owned by a company called TeamCo, which in turn is owned by four other companies, the last of which is owned by Frank McCourt. If you follow a different branch of the enterprise tree, you’ll find Blue LandCo, the company that owns the Dodger Stadium parking lots. Blue LandCo owns these parking lots because McCourt caused the Dodgers to give these parking lots to Blue LandCo. The Dodgers got nothing for this give-away, but they now pay anywhere from $6 million to $9 million a year in rent for these parking lots. With this rental stream as security, McCourt was able to borrow somewhere between $60 million and $70 million through Blue LandCo, most of which went to “fund the lifestyle” of the McCourts.
In similar fashion, LA Real Estate, LLC (RealCo) owns Dodger Stadium, because McCourt caused the Dodgers to give the Stadium to RealCo. The Dodgers now pay rent on a Stadium they used to own outright. In all likelihood, RealCo has borrowed money, too.
The most significant of these give-aways is one in favor of Dodgers Tickets, LLC, the company that borrowed the $250 million I mentioned above to finance the team purchase debt. Dodgers Tickets, LLC has since borrowed an additional $140 million to fund both Stadium improvements and McCourt family “lifestyle” expenses. Dodgers Tickets, LLC owns the Dodgers’ right to sell tickets to Dodgers games. These rights have in turn been pledged to the lenders who funded the $390 million of aforementioned debt. In all likelihood, the Dodgers’ tickets proceeds now flow into a “lock box” account controlled by these lenders – the Dodgers probably see none of their own ticket revenues unless and until the demands of these lenders have been satisfied.
Confused? In a fundamental sense, all this is simple to understand. The only thing on the above chart that generates money is the Dodgers. Nearly everything else on the chart feeds off the Dodgers. In turn, the McCourt family feeds off the chart. Frank McCourt likes to refer to his “overall businesses” – for example, McCourt claims that his $5 million annual salary “wasn’t from the Dodgers, but it was from my overall businesses.” But McCourt’s “overall business” is the Dodgers.
The McCourts lived very nicely off the Dodgers for a number of years, but eventually the Dodgers “credit card” had to max out. However, no one expected the card to max out so suddenly. At an early point this year, it became apparent that Frank McCourt was struggling to meet the team’s payroll. He borrowed $55 million from Fox to meet the team’s expenses through April. He got sponsors to pay their sponsorship fees in advance, at a discounted rate (once again, McCourt mortgaged the future to pay for the present). He tried to sell Time Warner the naming rights to Dodger Stadium. As McCourt has scrambled, the team’s debt has climbed, reportedly to $525 million. But in truth, we don’t really know the full extent of the debt owed by the McCourt enterprises, any more than we know the amount the McCourts have withdrawn from the Dodgers over the years.
We also don’t know why the Dodgers are suddenly so cash-strapped. McCourt has said publicly that the team had scheduled “capital requirements” – this is probably a thinly disguised reference to some requirement to pay back debt. We know that McCourt has been trying to raise money since the middle of last year, possibly to refinance debt that was about to come due. But Bank of America turned down his request for a $125 million loan. A bank in Beijing would not agree to become a private equity investor in an “international sports partnership” that would have included the Dodgers. McCourt’s last hope is the proposed deal with Fox.
But the Dodgers’ financial woes can be understood in a different way. McCourt has systematically stripped the team of much of its value – the team no longer owns its Stadium or its parking lots or even its ticket revenues. The Dodgers don’t have much left in the way of revenues: just the sponsorship income and whatever Bud Selig allows the team to extract from Fox.
But the Fox deal is not a good one for the Dodgers. As Maury Brown pointed out over at bizofbaseball.com, the model Fox TV deal is the one Selig approved last year with the Texas Rangers, with a cash up-front payment that the Rangers used exclusively to sign ballplayers and fund capital improvements. McCourt’s deal with Fox is a different animal. Brown states it simply: under the proposed deal with Fox, “money that should be going to the Dodgers funnels into the divorce.” That is, unless Selig blocks the Fox deal, as he should do.
Blocking the Fox deal will not be easy for Selig, as McCourt is not likely to go quietly. If Selig seizes control of the Dodgers, McCourt will almost certainly challenge this action in court. At this moment, I’m not entirely certain about the grounds for such a lawsuit – most likely McCourt will claim that Selig is exercising his power in violation of an implied covenant of good faith and fair dealing. McCourt will claim that he’s being singled out unfairly, in effect that other teams (i.e., the Mets) have also been run into the ground by their owners. The thinking in some quarters is that Major League Baseball will have to release heretofore confidential financial information in order to defend this suit, and that the released information could be used by the baseball players’ union as ammunition in upcoming labor negotiations.
If this strategy doesn’t work, McCourt has other legal options. McCourt could drag the Dodgers into bankruptcy. Or McCourt could allow Selig to run and eventually sell the Dodgers’ team, while McCourt retains ownership and control over Dodger Stadium, the Stadium parking lot, even the Dodgers’ ticket revenues. What would the Dodgers be worth if they were sold apart from these key assets? Who would buy the Dodgers if doing so meant becoming McCourt’s tenant?
Selig may be tempted to throw up his hands and walk away from this mess, leaving Frank McCourt as owner of the team (at least until Judge Gordon decides if the team is community property) and the Dodgers to their fate. But if he does so, a precedent will be set. Baseball team owners will be able to thumb their noses at the Commissioner’s office, incur debt exceeding baseball’s rules, and loot their teams for whatever they might be worth. Every baseball team will reorganize its ownership structure, so that the team’s most valuable assets are owned by outside companies, and the team itself is just a shell consisting of player contract liabilities and other obligations. The next Commissioner who wants to suspend a George Steinbrenner or force out a Marge Schott will have to do what Selig was unwilling to do, and prove his case in court.
Moreover, we should not expect that version 2.0 of Frank McCourt’s ownership will be any different from version 1.0, even if Jamie McCourt loses her claim to Dodgers ownership and disappears from the picture. Frank McCourt may promise to scale down his lifestyle, but remember that his idea of a scaled-down lifestyle is to live in a suite at the Montage Hotel. Per the court-approved settlement proposal, Jamie McCourt will walk away with all four L.A. mansions; Frank McCourt is going to need an appropriate place to call home when all this is over. Frank McCourt may say that he can be trusted, but in May he stated “that all of the proceeds from this transaction with Fox would be put into the team and … none of them would be used for my personal situation however you want to define that.” McCourt claims that he made this promise to the Commissioner’s Office – it took him less than two months to break this promise. We can bet that other promises will be broken if McCourt is permitted to retain ownership of the Dodgers.
If Selig approves the Fox deal, then the amount extracted by the McCourts from the Dodgers will more than double, to over $200 million, not including the debt incurred by the Dodgers that allowed McCourt to buy the team in the first place. (Steve Dilbeck at the L.A. Times has analyzed the proposed settlement and concluded that the $80 million debt payment would go for Frank McCourt’s personal use and would not benefit the Dodgers. So per Dilbeck, the Fox deal would bump the McCourts’ withdrawal of Dodger cash to around $300 million.) But the McCourt looting of the Dodgers will not end with this Fox payment. Under the proposed divorce settlement, if Judge Gordon awards ownership of the Dodgers to Frank McCourt, Jamie McCourt is entitled to an additional $45 million payment within two years. Until Jamie McCourt is paid in full, Frank McCourt is required to pay her millions of dollars in additional support. Where will this money come from? From the Dodgers, of course: the Dodgers are Frank’s McCourt’s sole source of money. If Frank McCourt is permitted to control the Dodgers going forward, then we can be sure that an additional $50 million or so will be withdrawn from the Dodgers to make the final payments owed by Frank McCourt to his ex-wife.
The looting of the Dodgers may not end with these payments. Remember that the proposed Fox deal would pay over $200 million up front to the Dodgers. What stops McCourt from withdrawing that money for his personal use? For that matter, what prevents McCourt from borrowing additional sums against the new Fox contract, effectively mortgaging the Dodgers’ future for additional “lifestyle” cash? What, in fact, prevents McCourt from bleeding the Dodgers dry, to the point where the team (once again) will struggle to make payroll, and the Commissioner’s office (once again) will have to intervene to make things right?
When do we, as baseball fans, have the right to say “enough”?
Only one thing prevents Frank McCourt from looting the Dodgers until nothing is left, and that is the power of the office of the Commissioner of Major League Baseball. Bud Selig will never have a better opportunity than he has today to exercise his power. He must reject the Fox contract, seize control of the Dodgers, sell the team to a responsible owner, and leave the McCourts to their lifestyles. His legacy as Commissioner is at stake. He should do what’s right, and say “enough!”
Larry Behrendt covers the financial and economic side of baseball for It’s About the Money, Stupid! You can follow Larry on Twitter, and follow IIATMS on Twitter and Facebook. This post was originally published on 6/20/2011.