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Sunday, February 19, 2006

McCourt To Hand Over Land To Fox

The Times reports that Frank McCourt is giving up 24 acres of Boston waterfront property to retire $145 million in debt under his agreement to buy the Dodgers.
Surrendering the land to News Corp.'s Fox Entertainment Group erases considerable debt from the Dodger ledger — leaving the franchise with about $250 million due to other lenders over the next 25 years — and severs one of McCourt's major business connections to his hometown.

But it does not fully resolve a question that has swirled around the Dodgers since McCourt's name first surfaced as a buyer: Can he afford to field a competitive team over the long haul?

The transaction — expected to be announced as a sale, though Fox sources call it a foreclosure — also sheds new light on just how badly Fox wanted out of the baseball-ownership business after six years with the Dodgers.

"Desperately," said a top baseball official, speaking on condition of anonymity because of policies barring discussion of club finances.

Damn, Arte Moreno's looking better and better as an owner all the time, and he doesn't even have to cut the price of beer at the stadium...
"He's the king of leverage; he's brilliant with other people's money," said a Boston city hall veteran who has clashed with McCourt, acknowledging the businessman's financial acumen. "Now he owns a baseball team in Los Angeles and 300 acres of land in California. You have to respect that."

Sources close to McCourt said neither the $145-million loan, as it is described in public documents, nor its pending settlement, have any bearing on the club's ability to sign talent or to maintain and improve Dodger Stadium.

That brilliance apparently extends to moving his debt as well. The deal includes the assumption of $58 million in debt that McCourt took on in part because of a $36M loan from the Sovereign Bank of Philadelphia, and a $22M agreement to purchase a nearby property from the state of Massachusetts.
"If his team bumbles again on the field and the Angels continue to do well, he'll continue to see a reduction in his fan base," said Andrew Zimbalist, a Smith College economist who later this month will publish "In the Best Interests of Baseball?" a book about the economics of the sport. "If he can put a decent team on the field and get over his credibility problems in L.A., he ought to be able to run the team in the black."

Fox, for its part, isn't hurting, Zimbalist added.

"They got the long-term media rights to the Dodgers, which is what [News Corp. Chairman] Rupert Murdoch really wanted," the economist said. "He got control over the regional sports market. … So News Corp. isn't worrying about whether McCourt underpaid by $40 million or $50 million."

If you have an asset that covers your debt, do you really have debt? Debt is just putting other people's money to work for you. If you have an asset to back it up, debt is never really a problem. If you lose the cash flow to pay the interest, you just sell the asset.

This is why I think baseball debt rules are silly. As franchises go up in value, teams should be able to turn equity into debt to keep the teams operating and competitive.
McCourt is going to do for Dodger baseball what Peter Angelos has done for Orioles basebal.
Fair enough, David, but what part of a baseball team -- let's say the Angels, who do not own their own stadium nor any of the land on which they play -- can be fairly called an "asset"?
A deed in lieu of foreclosure.
It is in the best interest of baseball for most its owners to have enough cash flow from their operations to field a competative team. Debt service takes up tht cash flow. If teams are just being re-sold year after year from one over leveraged owner to another, then you have a problem.
The trouble with that theory, Dean, is that MLB feels it acceptable to bend this rule at their discretion. There have been two notable instances of this. First, whenever stadium construction gets underway, the Debt Service Rule is dismissed. Second, it was dismissed at Bud Selig's insistance when the Dodgers were sold to Frank McCourt, at least, according to reports in the Times.

The players' union has long worried that the Debt Service Rule is nothing more than collusion dressed up as a health-of-the-game measure. There is some justification to this, and the 2003/2004 offseason in which Selig interfered with the Dodgers contractual negotiations is plain evidence of this.

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