Magic Johnson gives his acceptance speech at the 2011 California Hall of Fame Inductee Ceremony at the California Musuem on December 8, 2011 in Sacramento, California.
Forgive Los Angeles Dodgers fans if they are glowing today. Owner Frank McCourt, whose tenure resulted in a salacious divorce trial and a bankruptcy filing for the storied franchise, has sold the team. What’s more, Magic Johnson, one of the most beloved figures in L.A. history, is fronting the new ownership group.
While Dodgers fans cheer, however, sports-industry pros are scratching their heads. How did McCourt fetch a price, $2 billion in cash, that almost doubled the previous high for a U.S. pro sports franchise — real estate developer Stephen Ross’s $1.1 billion purchase of the Miami Dolphins back in 2009? “The number is ridiculously high,” says Marc Ganis, president of SportsCorp, a consulting firm. Or, as one prominent investment banker who has brokered several sales of baseball teams puts it: “The price is insane. If the Dodgers are worth $2 billion, what, are the Dallas Cowboys worth $7 billion? If you find anyone who can make any sense of it, let me know.”
Dodgers fans have to hope that the main financial backers of the deal — investment firm Guggenheim Partners and its CEO, Mark Walter — have more money to spare. Despite playing in America’s second largest market, the Dodgers have a $103 million payroll, just the 11th highest in baseball. To field a competitive team and keep L.A. fans (who have a reputation for front-running) in the seats, the team will have to bump up its payroll. “It’s going to take years of smart management, and consistently high attendance numbers, for the owners to recoup the value of the purchase price,” says Ganis.
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The incoming Dodgers owners are betting that revenues generated by a new television rights deal — the team’s current deal, with FOX, expires after the 2013 season — or a regional sports network, like the lucrative YES Network owned by the New York Yankees, will increase returns. If the Dodgers launch their own network, cable distributors are likely going to push for an equity piece. And can a new Dodger network fill its winter schedule? (The YES network, for example, broadcasts New Jersey Nets games during the baseball off-season). Time Warner just signed a $3 billion, 20-year agreement to broadcast Los Angeles Lakers games, starting next season. The Los Angeles Clippers signed a seven-year agreement with Fox in 2009.
Sure, the Southern California market is attractive. But is it twice as valuable, say, South Florida? And is a baseball team in Los Angeles worth twice as much as a football team in Miami, when NFL valuations have been consistently higher? According to Forbes, for example, the least valuable franchise in the NFL, the Jacksonville Jaguars, are worth $725 million. At that price, the Jaguars would be the the fifth-most valuable franchise in baseball.
And if you’re a suffering fan desperate for an owner to sell you favorite team, you might be out of luck. Given where the Dodgers have established the market, an owner is now more likely to hold out for a higher price. “This is going to cause tremendous dislocations,” says the investment banker.
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The Dodger deal could also add to labor tensions. Baseball’s players and owners signed a five-year collective bargaining agreement in November. But the fights could get uglier down the road. When franchise values skyrocket, players want to share in the gains. The owners are enjoying windfalls on the back of our labor, yet major league baseball insists on taxing teams that spend more money on players?
Thankfully for the owners, they have Magic. The presence of the Lakers legend, who has a minority stake in the team and promises to remain involved in its operations, can deflect attention from their challenges. “If the ownership group is smart, all they will be talking about is Magic, Magic, Magic,” Ganis says. “The team theme song should be, “do you believe in Magic?’”
Sure – if the new owners can make $2 billion reappear.
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