St. Louis Cardinals’ owner Bill DeWitt Jr was on St. Louis’ 590 The Fan this week and talked about the business side of baseball and negotiations with the players while they try to find a way to get back on the field and play the 2020 season. During the interview he dropped a bomb that caught a lot of attention on Twitter.
“The industry isn’t very profitable, to be honest. And I think (the players) understand that. They think owners are hiding profits. There’s been a bit of distrust there,” said DeWitt Jr.
The response is always quick when billionaire sports team owners play poor, most reactions pointing out the rise in value his investment in the St. Louis Cardinals has seen over the 25 years of his ownership group’s management of the organization.
DeWitt and the group that currently owns the Cardinals purchased them in 1995, along with a couple parking garages and real estate holdings, for $150 million. A year later, they turned around and sold those garages and that real estate for what varying reports would suggest is between $50 and $100 million. Meaning that their net cost to purchase the Cardinals is between $50 and $100 million as well. Forbes estimates that the Cardinals are currently worth $2.2 billion.
For DeWitt & Co., that’s somewhere between a 2100% and 4300% increase in the overall value of the franchise. Using compound annual growth rate, that comes out to a 13.2% to 16.3% annual return. To give you an idea of just how good that is, if they parked their money into the S&P 500 those 25 years ago, they would have gotten a 4.6% compound annual growth rate. Bernie Madoff promised his clients returns of around 10%.
That means the difference between investing in the S&P 500 and buying the Cardinals turns out to be about $1.8 billion.
But I think it’s always important to remember that just because the organization has seen their values increase at such an incredible rate, doesn’t mean that that money is available to spend. They are unrealized gains and the value of the franchise doesn’t impact profitability or cash flow. Until you sell the team, it’s value isn’t a tangible asset.
Teams do often borrow against that value for purchases and expansion projects. Scott Boras mentioned this in his letter to his clients, suggesting that the owners’ financial issues are their own issue for borrowing money to finance stadiums, real estate developments, and even purchasing teams in leveraged transactions. The Cardinals also have debt service on Busch Stadium.
Depending on how leveraged an ownership group may be, they may have issues borrowing further. But borrowing money also costs money, and that will affect long-term cash flow which in turn affects spending on payroll, front office infrastructure, and $8.25 million California homes.
I believe it’s important to understand that DeWitt is talking about profits on a year-to-year operational basis rather than overall investment gains. And probably not even direct cash profits, but rather audited accounting statement profits, which are completely different discussion.
To get a glimpse inside the accounting of a Major League Baseball team, lucky for us, the Atlanta Braves are publicly owned by Liberty Media and therefore subject to SEC requirements to file their financial statements on a quarterly and annual basis. In their most recent annual filing, Liberty Media provides some interesting insight into how they view and operate their baseball team as well as the debt load that they are under.
Liberty Media notes in the filing that the Braves generally fund their operating activities through cash flow from operations and credit. That right there tells you that they’re not generating enough cash from playing baseball to pay their bills. As of December 31, 2019, they noted that they owed $45 million under their operations credit line and that’s in addition to the $514 million that they owe on the construction of Truist Park, the development of The Battery (their Ballpark Village-esque real estate development), and their spring training facility.
All told, on December 31, 2019, the Braves owed $560 million on a Forbes estimated value of $1.8 billion. In the filing, Liberty Media also warns that expenditures on debt have increased and may impact the organization’s creditworthiness going forward. Think of that like their credit rating. The lower the score, the higher the interest.
On their income statements, Liberty Media reported that the Braves Group received $476 million in revenue in 2019 and reported an operating loss of $39 million. Given that we’ve determined that the Braves don’t bring in enough money from operations to fund the team, this isn’t very surpising. If you dig a little deeper into the financial statement though, they also report a $49 million adjusted operating income before depreciation and amortization, called OIBDA.
Income, you ask. Yes, there’s a distinction between a generally accepted accounting practices, or GAAP, profitability number you find on audited financial statements and a non-GAAP profitability number like OIBDA. It’s notable for reasons beyond the nearly $90 million swing in profitability.
When calculating a business’ profitability for financial statements, an accountant will follow the rules of GAAP when compiling the statements. The calculations of income will factor in all revenues and expenses, including tax donations, long-term capital investments and more. However, what is often seen are publicly traded companies trying to sell their stock to investors by using a figure like OIBDA by arguing that not all expenses are created equal and that only true operating incomes and expenses should be factored into determining profitability to give you a true picture of the financial health of the operations of the company.
OIBDA is a non-GAAP-compliant figure that removes the extra costs of the business in an effort to get closer to the profitability of the core business operations. At least, that’s the argument. So when businesses market their earnings report, they use OIBDA, which is almost always going to be higher than the standard profit and loss because it disregards certain and one-time expenses that don’t directly apply to the core business operations as well as depreciation and amortization of capital expenditures on buildings and equipment.
So the Braves can hand their audited financial statements to the Players’ Association and say that they lost $39 million last year, but they can also turn around and tell prospective investors that their operations made $49 million.
And this difference is the crux of the dispute between the Major League Baseball team owners and the MLB Players’ Association.
The owners provide the Players’ Association with GAAP-compliant, audited financial statements that reflect that lower profit number. But the players would argue that a non-GAAP-compliant figure like OIBDA better reflects the profitability of the team’s baseball operations without factoring large capital investments like multi-use real estate developments around ballparks like most teams are trying to build these days.
So while team owners can honestly say that by the financial statements that their teams aren’t very profitable, you also need to understand that there’s a high probability that that’s because they’re developing real estate projects rather than the core baseball operations being an issue.
The question the industry needs to answer is whether these are baseball teams or real estate developers. The Players’ Association’s argument is that these organizations are baseball teams first and that those are the numbers that matter when it comes to a team’s finances and making sure the players get paid. Real estate development is a secondary concern, so financial statements that reflect it aren’t representative of the business’ financial health. Their claim is essentially that the owners are hiding baseball profits in non-baseball expenses. And they’re probably right.
With collective bargaining talks around the corner, owners seem prepared to make another push for revenue sharing and the salary caps that come along with them. As a result, this is a question that the industry will need to determine. If a team takes proceeds from baseball to build a luxury apartment building and a 30 foot tall version of the Commissioner’s Trophy, is it fair to turn around and tell the players that the team isn’t very profitable?
The players and owners find themselves at an impasse at the moment while both parties try to figure out how to extricate themselves from this stoppage and it’s economic effects with the least amount of losses as possible. The owners want to reduce the long-term drain on their bottom line while the players understand that they’ll be feeling this stoppage at the negotiating table for years to come. For the same reasons, both parties want to get as much as they can right now.
The difficulty here is that the owners hold all the cards because they know what everyone makes, and until the two sides are on more equal footing, it’s going to be hard for them to come to a deal.
DeWitt Jr. wasn’t the only Major League owner doing sports radio this week. Diamondbacks’ owner Ken Kendrick joined 98.7 FM Arizona Sports to lament that baseball is the only major sport without a specific revenue sharing model, which is why the NBA and NHL haven’t had to deal with the same hurdles in their return to play efforts, because the economic side of it already spelled out in their collective bargaining agreements.
“What would be happening now — think about it — if this situation would have evolved and we had been in a revenue-sharing model? We would be acting as partners to get back together and get back on the field. The very lack of a revenue-sharing model puts us in an adversarial position when we really ought to be partners and advancing the game and building revenues because all would win in those circumstances,” said Kendrick.
My issue with that is that the owners don’t seem to actually want to be partners. When the owners made their first offer to return to play, the players asked for more financial information so that they could make a better informed decision on the financial health of the sport for a shortened season and the owners said no.
If the owners want to be partners, they need to act like partners. The owners being the side that holds all the cards, needs to be on the ones to act first.
In the end, if the owners can’t come to the negotiating table as partners, they shouldn’t expect the players to be. And in the long run, the game is going to be worse off for it.
Jon Doble has been writing about the St. Louis Cardinals since 2010. You can find him on Twitter at @GroundRuleDoble. Thank you for reading.