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Wednesday, May 04, 2011

Rebutting Frank's Claim That The $100M Figure Is "Inflated"

Awesome story by Dodger Divorce's Joshua Fisher at ESPN about what MLB special appointee J. Thomas Schieffer has to do now that he's a mole (and maybe more) in the Dodgers front office. I want to focus on this part, because Frank has been so damned insistent on trying to rebut it (all emphasis mine, as usual):
According to documents filed by Jamie McCourt in connection with the McCourt divorce last year, the sparring couple took at least $108.9 million out of the organization since purchasing the club in 2004. In an exhibit to the same filing, the family's banker once characterized Jamie McCourt's philosophy as "why have a family business but to support the family lifestyle?" Frank McCourt has recently blasted the $108.9 million figure as grossly inflated, claiming the McCourts have really taken only about $50 million of salary and distributions from the club. However, in his calculations, Frank does not include the Dodgers' de facto guarantee of a nearly $50 million dollar loan to the McCourts, which is secured by two parcels of land currently used as Dodger Stadium parking lots.

When an issue central to the divorce went to trial last fall, further evidence of how the McCourts viewed the Dodgers came into focus. At one point in the preceding years, the couple strategized about how to fund their $15 million-plus annual budget to support their lifestyle. Unable to set aside $250 million to invest for that purpose, Jamie McCourt took a note during a meeting with a financial adviser: "[R]ather, we will bake the annual number into our operating budget."

It is clear that the McCourts did not separate their personal finances from club operations, and figuring out how to keep Dodgers revenue inside the organization might be both Schieffer's most important and most difficult task. Potentially complicating his efforts are the numerous debt instruments encumbering various revenue streams, such as ticket sales.

It is for these reasons that I have for some time basically assumed that it would not be enough for MLB to take control of the team. MLB would also have to push the team into (and extract it from) bankruptcy, and then sell the team after all the various machinations had been unwound. And it is a very complex web; Fisher says that there were 22 separate entities as of last spring, assuming no new ones had been created hence.

I want to comment on Josh's point 5, "Be transparent":

For too long, Dodgers staffers and fans have dealt with uncertainty. Schieffer should -- within understandable limits, given a potential McCourt lawsuit against MLB -- be open and honest with the club's employees, fans, and media. He should also communicate to the greatest extent possible with Frank McCourt. This will improve the club's relationship with all stakeholders.
For their own reasons, this is not likely to happen entirely. I mainly believe that one of the few areas where Frank is largely correct is in his surmising the point of the MLB "investigation", namely, as a stalling tactic to find out which McCourt entity stops paying its bills first, and then to use that as a pretext for forcing the whole octopus (doicosapus?) into bankruptcy. They can't come out and say this, of course — this speaks to Joshua's point seven, "Have a disaster plan". Yes, they're planning on a disaster for Frank. That's the point. But they can't come out and say it.

Update: Bill Shaikin summarizes yesterday's whirlwind PR tour. More eventfully, McCourt has fired off a letter to MLB demanding they let the Fox deal proceed. This is going to be fun.

Update 2: Yahoo's Tim Brown reports that MLB executives, including Tom Schieffer, will meet in Milwaukee to discuss the Dodgers.

Update 3: MLB now says the Dodgers' woes are all due to Frank McCourt (duh!).

Fabforum "Any financial problems faced by the Los Angeles Dodgers are the result of decisions made by Mr. McCourt and his management team over a period of years," MLB executive vice president Rob Manfred said in a statement.
Oh, and Frank isn't playing nice:
"The pace of the commissioner's investigation has been adversely affected by the Dodgers' failure to produce documents in a timely manner and by the complexity of the financial structures surrounding the club," Manfred said. "The commissioner intends to complete the investigation promptly but will not accept less than a thorough investigation."
Jon Heyman:
Word also is that iconic former manager Joe Torre, a good friend of baseball commissioner Bud Selig and who was hired by MLB to be executive vice president of baseball operations, is one in the growing camp who lost faith in McCourt. Same apparently goes for ex-Dodgers executive Kim Ng, who was brought in to MLB by Torre. Torre is said to have been unhappy with McCourt not following through on promises to improve the team (which, as we now know, came at a time he was using money on himself).
Update 4: Bloomberg News has obtained the letter McCourt sent, and MLB's response.
“The commissioner’s continued delay and his conscious decision to put the Dodgers in this state of distress and make it a matter of public discussion is harming Mr. McCourt and the Dodgers,” according to one of the letters, which were reviewed by Bloomberg News. “Mr. McCourt reiterates his request that the commissioner immediately approve the Fox transaction.”
Update 5: The New York Times:
If baseball does not help McCourt — and he finds no other revenue source to pay his players — the players would be able to file notices of default with baseball. If McCourt does not pay within 10 days after May 31, they could become free agents.

Michael Weiner, the executive director of the Major League Players Association, said in an e-mail, “I am confident that all contractual obligations to players will be honored.”

It occurs to me that MLBPA might be the crowbar that Bud Selig uses to pry the Dodgers from McCourt. While Dodgers player salaries are right around $100M ($104M this year, $95M in 2010, $100M in 2009) in recent years, they're not keeping pace with the bigger spenders in the league. MLBPA certainly wouldn't mind if the Dodgers became another factor driving free agent salaries higher. A different owner might be more inclined to do that, especially one that isn't as encumbered with debt as Frank is. Both parties have their reasons for wanting Frank gone, and with ownership unified behind Selig, McCourt's exit is a fait accompli.

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Comments:
You know, I hate McCourt as much as anyone (besides maybe Jamie). It was obvious when it began that his stewardship of the team would end badly.

But is what MLB doing legal? I mean, taking control of McCourt's property and running it purposefully into the ground? It certainly isn't ethical. And I don't like Selig any more than I do McCourt.

Oh, well, I feel very bad for Dodger fans. No schadenfreude here; I have too many Dodger-fan friends.
 
The commissioner has a great deal of latitude in his "best interests of baseball" mandate, and I expect he plans on using that as the crowbar to pry Frank away from the Dodgers. Also, bear in mind that the other owners have to be thinking, "Could I be next?" I don't see them doing this but that there was a direct threat to every other franchise in the game (my take is that Frank's attack on Dodger equity would have resulted in a forced fire sale for the team that would have dragged down an upcoming sale of the Mets).
 
Calling the Dodgers the McCourts' "property" is a stretch one can reach only by drinking the McCourts' Kool-Aid. MLB is set up so that even though one can "buy" a franchise, MLB still retains ultimate control and can pretty much terminate franchise rights for just about any reason it wants.

How is MLB running the Dodgers into the ground? That was all McCourt's doing.

Sorry, Frank. I don't think your PR machine will work here.
 
Elaborating on the legal issues, in general the law is very permissive when it comes to a franchisor's (MLB) rights as against those of franchisees (teams). If you run a 7-11 or a McDonald's or any other number of franchise establishments, the franchisor can pretty much terminate your franchise agreement if you run afoul of just about any provision of the franchise agreement, and there's nothing you can really do about it. I have little doubt that MLB franchise agreements give MLB, through its Commissioner, virtually unfettered discretion when it comes to exercising "best interest of baseball" powers.
 
Thanks for the explanation, Rob, but don't you think that Selig should have taken action long ago? This is just one more problem he let fester.

Also, is it incorrect to call the Dodgers McCourt's property, whatever the limitations on his actions? Isn't he the legal owner?
 
Otis -- I don't think McCourt should have been "sold" the franchise in the first place, but it has always been my supposition that

1) Fox wanted a weak, undercapitalized owner who would have little choice but to come back to Fox for more funding, and to whom Fox could rely upon for future content (game broadcasts).

2) Making Fox happy (they write MLB some large checks for the Saturday afternoon broadcast exemption) was at the time a paramount concern for MLB. Despite the relatively small amounts of money Frank put into the team at the time (IIRC it was around $200M, perhaps less), MLB was only too happy to either ignore or waive the debt service rule for Frank at the time.

As jjackflash says above, the Dodgers are Frank's property, yes, but it has so many encumbrances and restrictions upon it at this point that we may as well declare it the bank's, and MLB's.
 
Rob, thanks for posting. I am concerned that Frank may be on to something--I mean, wouldn't it be reasonable to assume most MLB financial empires are run similarly (debt financing, labyrinthine organizational structure, robbing Peter to pay Paul, &c)? And our gubmint consistently operates in the red...just worried Frank may by dumb luck establish a disastrous precedent.
 
Thanks, Rob. I was just a bit alarmed that anyone would think I was a shill for McCourt. By the way, I should tell you that I used to post here as "rspencer", but when I started my own blog I adopted my nom de blog for every activity on Blogger, just to simplify matters.
 
4d3feet -- I have always assumed that it was Frank's threat to team valuations that has been what drove the uniform desire from the other owners to eject him. We simply don't know how commonplace such labyrinthine operating structures are, and the best window we have had into this -- the Rangers' bankruptcy -- doesn't seem to have had such complexity. But that said, I didn't follow that as closely as I have followed McCourt's descent into default.

Otis -- I never thought you were a "shill". The point you raise is vital in understanding the very real fears the other owners would have to overcome in voting to give Bud Selig the power to usurp McCourt.

I'll check out your blog when I get a chance and post a sidebar link. Thanks for the heads-up.
 
Thanks, Rob! I know you didn't think I was a McCourt shill, but nevertheless the accusation was out there.

Thanks also for the link offer. It reminds me that I still have to put in a links section myself, and certainly you'll be there. I should tell you, however, that my blog's subject matter is far removed from baseball; it mostly deals with technical discussions regarding the ongoing restoration of our Victorian home.

I'm sure I'll delve into Angels baseball eventually, just because it is so central to our daily life this time of year. I have an idea about a short bio of Bob Kelley, but first I'd like to figure out how to embed audio so I can put in some clips of him that I have.
 
Otis: I was the one who presumably planted the shill suggestion, for which I do apologize. I had suspicions only because the phrasing of a question/comment seemed to adopt the language used by McCourt.

As an aside, I'm very interested in your farm house blog. As a resident of Pasadena myself, it always pleased me to see old and historic homes lovingly restored & maintained (I live in a 1921 Colonial Revival bungalow).
 
Thanks, jjackflash. Check in at my blog and tell me more about your home.

Rob, I finally figured out how to add a blogroll, and 6-4-2 is now at the top.
 
Finally got around to adding yours to the sidebar, Otis.
 
I can't thank you enough, Rob: my first link! And thanks for the comment on my blog; it's great to get some feedback.
 

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