The Tribune Company is to announce the buyer of the Chicago Cubs baseball team this week. The short list is Chicago businessman Tom Ricketts, Chicago real estate investor Hersch Klaff and New York private-equity investor Marc Utay, according to a reporter at the Chicago Tribune, who must have, um, pretty good sources. Hope (or is it a goat) springs eternal for Cubs fans, now 100 years since a championship.
The only reason I bring this up is that Mark Cuban, famous hedger of Yahoo! shares after selling his company, owner of the Dallas Mavericks basketball team, frequent finee by NBA commissioner David Stern (another $25,000 last week!) explained a couple of weeks ago on his terrific site blogmaverick.com, why he wasn't a finalist for the Cubs. Inadvertently, or maybe blatantly, he gives the greatest explanation of today's asset values and what has gone wrong with the U.S. economy.
Crazy like a fox, that Cuban. It's just that without financing, the same identical underlying asset is worth much less!
"I never thought it conceivable that it would be hard to spend a billion dollars on a sports team. In this case it was. Add me to the list of people who never want to participate in this type of sales process again. I tried every trick I knew to try to get them to commit to me. ... You name the trial close, I went for it. But I couldn't close them." Like that bigger house down the block you got outbid on.
I've known Mark for a dozen years, back when he was a mere thousand-aire, peddling his company Audionet around Silicon Valley looking for clients. We chat every once in a while by e-mail, and he comes and says hello when Dallas plays Golden State. And still, I admit to living vicariously through Mark Cuban. Who doesn't? So many sports team owners wear bow ties and never venture out of the luxury box. Mark wears T-shirts, sits with his team, yells at refs and opposing players and absolutely lives and dies by wins and losses. He's still an adolescent, as a sports fan anyway, just like the rest of us.
But he's no business dummy. He bought the Dallas Mavericks and improved the fan experience (started winning) with the payoff of huge crowds. Repeat with the Cubs? Cuban was willing to spend $1 billion or maybe more, with a huge chunk financed by bank debt.
Was it worth $1 billion? I'm not privy to the cash flows, but I suspect, unlike the Mavs, what can be squeezed out of the franchise has been squeezed. They had the seventh-highest payroll in the league at $118 million. Can't cut that until after a World Series or risk getting the Steve Bartman treatment by Chicagoans.
The Cubs were also seventh in attendance at 40,743 per game.
There's not much more room at Wrigley. Tampa, which made the World Series, averaged 22,259. Hmmm. WGN is a Superstation, already with carriage on lots of cable systems and satellite. Upgrades to Wrigley Field over the last 25 years haven't cost much beyond bright lights. Ticket prices can be $50 or more for the bleachers, watered down beer is pushing $7 and it's $32 for an Authentic Performance On-Field Cubs cap. Ouch.
So, and here's where I differ with Mark, if you pay $1 billion, my guess is that it's more of a trophy than a business. I doubt it made all that much economic sense as a multiple of cash flow and profits. The greater fool theory is invoked. Like that stretch house--make the payments and hope it's worth more in five years and someone else will pay you more.
Cuban goes on: "Then the credit crisis hit and hit hard."
Oops. My guess is no bank would be willing to lend against existing cash flows, and it would be hard to increase cash flows.
"All of the sudden, what seemed like a sane business decision, didn't seem so sane any longer." The sanity being the banks taking most of the risk? "In particular, the financial participations I had been discussing with my bankers were for shorter-term loans. Just refinance at the end of the term ... except it no longer seemed like a safe bet that I could refinance in a few years ... for better or worse, the banks were getting worried about staying in business and the idea of matching the asset to the term wasn't something they were ready to do ..." Meaning the Cubs were going to be around for another 100 years, so how about at least a 10 or 20-year term on the loan.
So, fair to say, the Cubs are no longer worth $1 billion. Same team, same cash flows, more or less. Yeah, advertising will be down, but not by that much. It's just that without financing, the same identical underlying asset is worth much less!
How much less?
"With the credit market on the fritz, the other option was to add investors and just pay cash. However, if we were going to pay cash, I was not going to bid anywhere near $1 billion for the assets. Once the credit crisis hit, the value of cash went through the roof. It was not just a matter of how much the Cubs were worth, it was also a matter of how much more money I could earn with that cash. Cash was and is king. Distressed investment opportunities were rolling in the door that could make me multiples of what any sports team could. I could not see any scenario where the Cubs were worth anywhere near the numbers that had been discussed in the media."
Down 40% is my guess. Everything is down that much. $600 million or less is probably the right answer. Pay more and new owners won't be able to buy the next hot pitcher or Manny Ramirez's bat. Cuban sums it up: "The absolute last position I wanted to be in was paying so much for the team, that if revenues fell off, I couldn't play to win." Crazy like a fox, that Cuban.
So here we sit in early 2009. Banks aren't lending much, so assets are being quickly revalued back to some rational cash-flow multiple. A house is increasingly worth what your income cash flow can afford to carry mortgage payments, not what the next sucker will pay to take it off your hands. Same for stocks. Earnings were and are king. Low-debt or debt-free companies with earnings potential once the economy bottoms out will be the next wave of winners. Debt-ridden companies have a long workout ahead.
Something will get the Cubs, er, the economy back towards the World Series--an opposite field hitter, speed on the bases, long relief, who knows. Will it take a stimulus package/New York Yankees $209 million payroll? I doubt it. The trick is to get as quickly as possible to rational pricing. What is something worth with normalized profits and cash flow? That's what forms market bottoms and gets bankers lending again. If someone overpays for the Cubs now, Mark Cuban may have another chance at them.