Undercurrent of Cubs’ rebuilding is baseball’s heaviest debt
BY GORDON WITTENMYER firstname.lastname@example.org March 31, 2013 10:14PM
Cubs at Pirates
The facts: 12:35 p.m., Ch. 9, 720-AM.
The pitchers: Jeff Samardzija (9-13, 3.81 ERA in 2012) vs. A.J. Burnett (16-10, 3.51).
CF David DeJesus
SS Starlin Castro
1B Anthony Rizzo
LF Alfonso Soriano
RF Nate Schierholtz
C Welington Castillo
3B Luis Valbuena
2B Brent Lillibridge
P Jeff Samardzija
THE REST OF THE SERIES
Wednesday: 6:05 p.m., CSN, 720-AM. Edwin Jackson (10-11, 4.03) vs. Wandy Rodriguez (12-13, 3.76).
Thursday: 11:35 a.m., Ch. 9, 720-AM. Travis Wood (6-13, 4.27) vs. James McDonald (12-8, 4.21).
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- Cubs, city to keep talking Tuesday about possible Wrigley deal
Updated: May 2, 2013 6:34AM
PITTSBURGH — So just how good is the Cubs team that will take the field Monday against the Pirates to open yet another season of low expectations?
Maybe this is a better question: If the teams switched uniforms, would anyone know the difference?
In 31/2 years of Ricketts family ownership, the Cubs have gone from the top of the economic food chain in the National League Central to a team that operates and even looks like the small-market Pirates, who have endured 20 consecutive losing seasons.
“He’s behaving like he’s a mid-market team,” famed sports economist Andrew Zimbalist said of Cubs chairman Tom Ricketts, whose family owns the most profitable team in the majors in the third-largest market in the country.
In terms of their timeline to be competitive, the Cubs could have a problem because their mid-market behavior appears to be caused as much by the debt left from the Ricketts’ highly leveraged purchase of the team as any premeditated rebuilding process.
Zimbalist, an economics professor at Smith College in Northampton, Mass., cautions against using baseball spending levels as a basis for criticizing ownership, pointing out the light correlation between performance and payroll and what might be nothing more than a function of a longer-range business plan.
But the original point becomes especially relevant when measured against promises made by ownership to fans and its baseball department since taking control of the franchise from Tribune Co. in the fall of 2009, especially in light of a recent Forbes report listing the Cubs as the most profitable Major League Baseball team and the fourth-most valuable at $1 billion.
In fact, Ricketts opened the door to criticism when he called a then-frozen $146 million big-league payroll at the time of the purchase “unsustainable.” That was despite the relative market advantage, growing team revenues within the $8 billion industry and repeated public pledges to maintain the existing annual percentage of operating revenue for baseball operations.
For all the talk from Ricketts about the family’s “mission” to win, dozens of conversations with banking experts, attorneys, sports economists and baseball officials inside and outside the organization suggest that ownership’s focus since the purchase has been to climb out from under the heaviest debt load in the majors.
It explains almost every conspicuous move by the business operations since then, from the push for more concerts and football and hockey games at Wrigley Field to various efforts for public partnerships in achieving Wrigley renovations to the infamous (and since-departed) noodle in front of the ballpark.
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Under the plan by which family patriarch Joe Ricketts agreed to commit liquidated TD Ameritrade stock, his four children, led by Tom, paid $171 million and financed the remaining $674 million of the purchase price through outside private-company investors, bank loans and a family trust. A $175 million portion of it is due for payoff or refinancing in October.
While some have called the Ricketts’ financing of the $845 million purchase “novel” and “creative” in published reports, others call it a “mess.”
Even two years ago, a source with direct knowledge of the paperwork told the Sun-Times it would prevent the Cubs from spending significantly on the big-league product for several years. That prediction has coincided with an austerity-based rebuilding program.
The family trust portion of the financing is the key, insiders say.
Experts in the area of family trusts say that an incentive for using that vehicle — which otherwise comes with one of the biggest tax bites in banking — is to shield personal assets from loan liability.
But that, in turn, comes with strict requirements for the business operation of those assets, including meeting bank “covenants” that often dictate revenue-to-spending and profit-to-cost relationships across periodic deadlines.
That could help explain why the Ricketts’ takeover of the Cubs coincided with immediate and continual budget cuts for the baseball operations, according to multiple front-office sources, including periodic midseason cuts that trimmed existing, promised budgets, such as amateur spending.
Ricketts, through a family spokesman, didn’t dispute that the debt structure has influenced operating budgets, but he denied any negative impact on the long-term “strategic” efforts of second-year team president Theo Epstein and general manager Jed Hoyer to build a winner.
“All I can tell you is when Theo and Jed get to the point where they need more resources to execute their plan, the Ricketts family will be there for them,’’ spokesman Dennis Culloton said. “It’s as simple as that.”
Culloton characterized the complex and heavy debt structure as a “requirement” of then-Tribune owner Sam Zell for Zell’s tax benefit, though others characterize it more as a function of Joe Ricketts’ unwillingness to sink more of the family’s fortune into the team.
Asked why the family hasn’t paid down much of the debt now that it’s 3½ years clear of Zell, Culloton called it a “complicated process.”
Culloton said the $32.1 million figure Forbes used to illustrate the Cubs’ profitability is “not accurate.”
Regardless of the actual number, multiple sources said business operations president Crane Kenney told staff last summer he learned the team was MLB’s “most profitable.” Culloton did not specifically dispute that.
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It’s doubtful Epstein knew exactly what he was working with when he left the Boston Red Sox for the Cubs in the fall of 2011. He declined to talk specifically about what his expectations were and what his budgets have been since arriving.
But the guy who outbid the field to land Japanese pitcher Daisuke Matsuzaka, a key to the Red Sox’ 2007 World Series championship, didn’t come close to beating the competition with his 2011 posting bid for Yu Darvish. The Texas Rangers’ winning bid was less than Epstein’s $51.1 million bid for Dice-K five years earlier.
The Los Angeles Dodgers blew the Cubs away with a winning posting bid of $25.7 million for Korean pitcher Ryu Hyun-Jin this winter.
“We have enough revenues to execute our plan given the stage that we’re in,” Epstein said, “and we expect with our business plans to have a lot more resources, soon, when the time is right to increase our spending.”
But Epstein also told CSNChicago.com in late March:
“Our ability to leverage our market size into financial advantages is more difficult than I expected. “I thought that would have been something that was easier for us to do, and do now. Instead, it’s something that is out of necessity probably several years away.
“But given the timeline we’re on, that’s not the worst thing in the world, as long as we get there.”
National-TV revenues will increase for all teams starting next year, with between $20 million and $25 million more going into the Cubs’ coffers. The team is expected to leverage its opt-out clause with WGN to substantially increase local over-the-air revenues by 2015.
And if the Cubs get the Wrigley Field renovations done according to plan, their own estimates at one point last year suggested at least $95 million of additional annual revenue, according to a team source.
Even the financing of the renovations, according to internal club documents, will result in tens of millions of dollars in Stadium Investment Credit against their revenue-sharing bill through MLB.
“What [Tom Ricketts] is doing is what most owners would do,” Zimbalist said, adding that the real judgment day will come when Epstein says the team is ready to win, pending a free agent or two, and Ricketts has to decide whether to write the check.
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Until then, Cubs fans are being asked to pay some of the highest ticket prices in baseball. Prices jumped 23.9 percent in 2008, 12.4 percent in ’09 and 10.1 percent in ’10, according to Wilmette-based Team Marketing Report.
That last hike came in the Rickettses’ first season of ownership, and the prices have remained essentially flat since then.
Meanwhile, big-league payroll has gone down roughly 25 percent, with no commensurate spending in other areas of baseball operations. Amateur spending has been limited dramatically by MLB since then. The Cubs made one-time capital investments in a computer system and video equipment but cut scouting costs by leasing a fleet of cars and cutting per diems.
Even the state-of-the-art Dominican Academy, scheduled to open next month, cost a modest $7 million.
Imagine where the ticket prices will be when the renovations are done and the team is, presumably, competitive again.
It all means that, as Cubs ownership continues to wrestle with its debt — and eyes an important fiscal deadline in October — ticket-buying fans are subsidizing the very process that might price many of them out.
“Unfortunately, it’s part of sports,” said Chicago-based sports business consultant Marc Ganis, who consulted for Tribune Co. on the Cubs sale and has worked extensively with other teams, including the New York Yankees.
“Look at the Yankees’ [even higher] ticket prices, and the thing you know you’re getting with the Yankees that you haven’t gotten with the Cubs is a team that’s fighting for a championship year in and year out, that you know — maybe with the exception of this year — will spend and do everything possible it can to get there.
“No matter how much positive feeling there is for Tom Ricketts as the nicest guy, that’s never been the perception of the Cubs. In New York, George Steinbrenner wanted to win more than anybody, and they knew it.”