O/T-The Economist on the 'business of baseball"

The Texas Rangers are sold
Even in sport, a Pyrrhic victory
Aug 6th 2010, 17:24 by The Economist online

AFTER the Texas Rangers baseball club was sold for $593m at a bankruptcy-court auction on August 5th, the franchise’s owner, Tom Hicks, called the outcome "a win-win for all parties." It certainly looked that way. The victor was the investment group Mr Hicks had originally struck a deal with, led by Chuck Greenberg, a lawyer, and Nolan Ryan, a legendary former Rangers pitcher. Major League Baseball (MLB) dodged two bullets. Mark Cuban, the rival bidder and the owner of the Dallas Mavericks basketball team, is well-known for criticising referees, and might well have increased the Rangers’ player payroll. By bowing out once the bidding reached $581m, Mr Cuban spared the league both a difficult decision on whether to admit him had he emerged victorious, and a court battle had it sought to block him. Finally, the holders of $525m in defaulted debt issued by Hicks Sports Group (HSG), the company that controls the Rangers, got $100m-130m more in cash than they would have had they not convinced a judge to reject the initial sale agreement between HSG and Mr Greenberg’s group.

Yet just like in many auctions, Mr Greenberg and his backers may have fallen victim to the winner’s curse. Forbes magazine estimated the club’s value this year at only $451m, and calculated its operating income at just $17m in both 2008 and 2009. Although the team has done surprisingly well this year—they are almost certain to make the playoffs that determine the season's champions, for the first time since 1999, which should generate at least $30m in extra revenue—it will need to sustain this success for several years to rebuild its fan base (its average game attendance has been 21% lower over the last five years than it was from 1996-2001). And unlike in the original version of the sale agreement, they will not be able to count on profits from the lucrative car parks surrounding the team’s stadium, which are also used for Dallas Cowboys football games, to offset mediocre earnings from the team—the bankruptcy court stripped out an associated land deal from the sale. The high purchase price could also strengthen the players’ union’s argument against the owners’ efforts to restrict salaries during the next round of collective bargaining in 2011.

The real winners are the creditors, particularly Monarch Alternative Capital, a distressed-debt hedge fund which scooped up HSG’s paper on the cheap after it defaulted. While the bondholders have been pilloried in the press, as "vulture" investors are often portrayed, their victory is good news for teams hunting for financing in future. Now that a precedent has been set that lenders can turn to the courts if MLB or its owners try to sidestep them, they will probably be more willing to offer funding

[FrankWakefield]

Thanks for posting. It's a clear explanation of what happened, instead of a misleading headline or misleading soundbite.

[Leon]

I am glad that Nolan Ryan will be the new part-owner. One bit of misinformation, if what I just read is correct, is that the Cowboys play their games there also. We all know that Jerry World is where they play their games now. I am sure that was taken into account in the bidding process. Nice post Bruce and sorry I missed you at the National.... Terry K Sr. told me you were at his table but when I was there you must have already left. best regards

[Jim VB]

Originally Posted by Leon

I am glad that Nolan Ryan will be the new part-owner. One bit of misinformation, if what I just read is correct, is that the Cowboys play their games there also. We all know that Jerry World is where they play their games now. I am sure that was taken into account in the bidding process. Nice post Bruce and sorry I missed you at the National.... Terry K Sr. told me you were at his table but when I was there you must have already left. best regards

I think what the article means is that there are numerous parking lots surrounding the stadium and that these lots are also used for parking during the Cowboys games.

I know for a fact that many of these lots are also owned by Tom Hicks, yet were not covered by the liens that the creditors had against the Rangers. (This was a poor job of structuring the loans years ago.) Therefore, in the original agreement, when $75 million of the sale was designated to cover these properties, that money would have gone to Tom Hicks, and not to the creditors. The judge stripped that provision out of the agreement. I believe that means that Hicks still owns these lots and will have to sell them later, but for now, all money collected will go toward the collected debts.

I loved the way this worked out. The creditors were the ones backing the Cuban bid. They were encouraging him to get involved for a long while. By doing so, he increased the price close to $150 million. Net result is the creditors will walk away with close to 75 or 80 cents on a dollar, when they were looking at 50 cents.

[Griffins]

what I don't get about all this is that the secured creditors get .70 or whatever on the dollar, and the unsecured creditors (like ARod) get 100%.
Every time I've been stiffed on a BK from a client it's been the opposite, with unsecured creditors lucky to get .10 on the dollar.
Was there something in ARod's contract that put him at the front of the line?

[Jim VB]

Originally Posted by Griffins

Was there something in ARod's contract that put him at the front of the line?

Good point. To my knowledge there wasn't. (It wasn't just Arod. He's owed about $27 million in deferred comp, but the total unsecured debt was about $204.) I think MLB and even the new owners were concerned about the precedent set if any owner defaults on deferred comp. I would assume that the first time it happens will be the last time any player agrees to deferred comp.

Meanwhile the secured creditors weren't "little guys." The original venture capital fund had already given up and sold the notes to a hedge fund for cents on the dollar. So the current owners of the paper (Monarch Alternative Capital) will actually make money on this deal because they bought the notes cheap.

So the only real losers actually lost the money a few years ago and weren't a part of this process.

[FrankWakefield]

Owed wages or compensation ranks above unsecured debt. The wages angle is what probably got ARod ahead of the unsecured creditors.

[Jim VB]

He's ahead of the secured creditors. The secured creditors accepted partial payment. The unsecured creditors were guaranteed 100%.

[martyogelvie]

Originally Posted by Leon

I am glad that Nolan Ryan will be the new part-owner. One bit of misinformation, if what I just read is correct, is that the Cowboys play their games there also. We all know that Jerry World is where they play their games now. I am sure that was taken into account in the bidding process. Nice post Bruce and sorry I missed you at the National.... Terry K Sr. told me you were at his table but when I was there you must have already left. best regards

Leon, the way I read it... the Rangers SHARE some of their PARKING lots with the Cowboys... not stadium..

[dstudeba]

Originally Posted by Jim VB

Good point. To my knowledge there wasn't. (It wasn't just Arod. He's owed about $27 million in deferred comp, but the total unsecured debt was about $204.) I think MLB and even the new owners were concerned about the precedent set if any owner defaults on deferred comp. I would assume that the first time it happens will be the last time any player agrees to deferred comp.

I think it is more about wages as Frank said than about what precedent is set. Since it is handled by the court I believe they have to go by normal bankruptcy code instead of what would be best for MLB. Despite the arcane monopoly exemption MLB enjoys they still have to follow other corporate laws.