Forbes.com - Chicago Cubs Economy

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.

Comments

[mattheca]

Great piece, especially the parallel to the housing market. As most people buy homes on credit (i.e. "what's it gonna cost me per month?"), you can't underestimate the importance of low mortgage rates on asset appreciation. Cubs have a "problem" in that Wrigley is Chicago's biggest and best beer garden - nothing like a summer afternoon on the north side. Fans will show no matter what, and they will watch their hard luck team on WGN no matter what, so what is the real incentive to spend that incremental dollar to win the WS? Unless, as you point out you can do it with other people's money...

[Jeff Eckles]

Nice job Andy- one of your better pieces. An entertaining and educational slant depicting the cure of our economic ills: A bitter pill called DELEVERAGING.

[Bob]

Another great post! This is one of the few blogs/sites to "tell it as it is" in well written posts based on rational analysis. Keep up the good work!
Bob, London, UK.

[MC-Shalom]

You Bail Them Out, We Opt Out.

Dear, I should say Expensive Chairman Ben S. Bernanke,

All of Our Economic Problems Find They Root in the Existence of Credit.

Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

If my bank doesn't pay back its credits, how come I still must pay mines?

If my bank gets 0% Loans, how come I don't?

At the same time, everyday, some of us are losing our home or even our jobs.

Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn't it? It is an supra national stealth weapon of class struggle.

Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?

Where are you exactly in that food chain?

Credit gets in the way of All the Principles of Equal Opportunity and Free Market.

Credit is a Stealth Weapon of Mass Destruction.

Credit is Mathematically Inept, Morally Unacceptable.

You Bail Them Out, We Opt Out

Opting Out Is Both Free and Strictly Anonymous.

My Solution: The Credit Free, Free Market Economy.

Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

I Am, Hence, Leading The Exit Out of Credit:

Let me Outline for You my Proposed Strategy:

✔ My Prescription to Preserve Our Belongings.

✔ Our Property Title: Our Free, Strictly Anonymous Right to Opt Out of Credit.

✔ Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

✔ Asset Transfer - Our Right Grant Operation - Our Wealth Multiplier.

✔ A Specific Application of Employment, Interest and Money.
[A Tract Intended For my Fellows Economists].

If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless Already?

Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that are managing?

We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

It will be either awfully deadly or dramatically long.

A price none of us can afford to pay.

“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

- Henry A. Kissinger

What Else?

Until We Succeed the Economy Will Necessarily Sink Into a Deeper and Deeper Depression

You Bail Them Out, Let's Opt Out!

Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.

Let me provide you with a link to my press release for my open letter to you:

Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!

I am, Mr Chairman, Yours Sincerely [Do I have really the choice?],

Shalom P. Hamou AKA 'MC-Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640
Fax: +972 3 741-0824
http://edsk.org/

[FreemonSandlewould]

Cuban appears to be a flim flam fast talking car salesman type to me. But that is just me.

[Lorraine]

Great post on a well thought out and intelligent blog.

[Mike]

Ok, I don't know about this analysis entirely. Maybe I am missing the point. The value of future cashflows is partly a function of cost of capital, both cost of equity and cost of debt, right? Right.

So, if cost of debt goes up... then it makes sense that you get a lower valuation on same cashflows. Of course, your speculation Andy is that the bank itself was supposing the "greater fool theory." Was it? Hard to say. But we don't know. Also, I am not sure how these things typically work but in the tiny world that I inhabit, debt comes with warrants, equity participation, etc., so cost of debt in this case REALLY incorporates a cost of equity component. Andy, you seemed to argue against this. But maybe I misunderstood!

There does seem to be a big poo-pooing of debt here, but I disagree with that. Nothing intrinsically wrong with it, it's just another way of slicing up your cashflows.

*I'd* say that when the recovery comes (if), the REAL winners won't be the low-debt companies; they will be the firms with medium, substantial-but-still-sustainable debt that maximizes the rate of return on equity.

[Louise]

The Cubs should be competitive enough to keep pace with the others teams. I really like the Cubs . They’ve always been one of my favourite MLB teams to watch. I pass most time watching and looking for their news and videos. Last time I saw some hot videos of them here:

http://www.cubszone.com

They really deserve our love so we must not stop supporting them .Go Go Cubs

[MasseyMalinda34]

I strictly recommend not to wait until you get enough amount of money to buy all you need! You should just get the credit loans or sba loan and feel comfortable

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