Reason for concern in Cubs sale?

[JGalt73]

From The Biz of Baseball's Maury Brown:

 

Is Zell screwing the Cubs?

 

On the comments regarding the sale of the Cubs, Selig brings up a critical factor within the proposed sale: debt structure. As Selig said, “(Tribune Co. CEO) Sam (Zell) knows what our economic rules are. We have a lot of 'em.”

 

Selig is concerned – as are the owners – about the tax-avoidance structure that Zell is proposing in the sale. Zell can dodge $400 million or more in taxes by not making the sale a “sale”, but rather what is called a leveraged partnership. In 1981 Tribune purchased the Cubs for $20.5 million. Current estimates for the Cubs, Wrigley Field, and a 25 percent stake in ComcastSports Chicago are well in excess of $1 billion. As a straight sale, the taxes would be around the $400 million mark.

 

By having the Tribune Company retain minority ownership (less than 5%) – and through some other IRS reclassifications – the new owners wouldn’t start making heavy payments on the club until 10 years after the transaction is completed.

 

To make a complicated story short, with the deal structured this way, the new owners borrow money to make the purchase and only some cash is paid up front. With Tribune still having a stake in the Cubs (albeit no more than 5%), they assume a portion of the debt, which is why it technically wouldn’t be a “sale.”

 

This places a heavy burden on the new owners. As Selig mentioned, there are economic rules in place – most of which Selig put in place – to keep owners from putting themselves too far in debt. The 60/40 rule is one. In its simplest form, the 60/40 rule means that clubs are not allowed to carry more than 40% debt compared to their total assets. The Cubs deal could skirt right up to the edge of this rule.

 

MLB has been known to bend their rules depending on the particulars. For example, the same concerns were in play when News Corp. sold the Dodgers to Frank McCourt. The owners, however, approved that deal.

 

If you’re a Cubs fan, there are reasons to side with Selig’s concerns. An owner saddled with debt means less money to use for player payroll. The Tribune Co., in an attempt to go out a winner and break a 100-year World Series futility record, has pumped loads of greenbacks into player payroll, much of it in the form of backloaded contracts. The new owners will be taking on a hefty player payroll commitment, as well as the Cubs sale debt.

 

What does that mean?

 

If you live and die by the Loveable Losers, pray hard that the Cubs win it all this year, or in the next few. It may be a while before the new owners have their cash flow situation under control so they can be as aggressive in the free agency market as they may want to be.

[Burtonbell]

:cray:

Sounds like this both sucks and blows.

[nilodnayr]

But doesn't Cuban have enough money to do the debt "sale" AND do whatever he wants with payroll?

[CubinNY]

From The Biz of Baseball's Maury Brown:

 

Is Zell screwing the Cubs?

 

On the comments regarding the sale of the Cubs, Selig brings up a critical factor within the proposed sale: debt structure. As Selig said, “(Tribune Co. CEO) Sam (Zell) knows what our economic rules are. We have a lot of 'em.”

 

Selig is concerned – as are the owners – about the tax-avoidance structure that Zell is proposing in the sale. Zell can dodge $400 million or more in taxes by not making the sale a “sale”, but rather what is called a leveraged partnership. In 1981 Tribune purchased the Cubs for $20.5 million. Current estimates for the Cubs, Wrigley Field, and a 25 percent stake in ComcastSports Chicago are well in excess of $1 billion. As a straight sale, the taxes would be around the $400 million mark.

 

By having the Tribune Company retain minority ownership (less than 5%) – and through some other IRS reclassifications – the new owners wouldn’t start making heavy payments on the club until 10 years after the transaction is completed.

 

To make a complicated story short, with the deal structured this way, the new owners borrow money to make the purchase and only some cash is paid up front. With Tribune still having a stake in the Cubs (albeit no more than 5%), they assume a portion of the debt, which is why it technically wouldn’t be a “sale.”

 

This places a heavy burden on the new owners. As Selig mentioned, there are economic rules in place – most of which Selig put in place – to keep owners from putting themselves too far in debt. The 60/40 rule is one. In its simplest form, the 60/40 rule means that clubs are not allowed to carry more than 40% debt compared to their total assets. The Cubs deal could skirt right up to the edge of this rule.

 

MLB has been known to bend their rules depending on the particulars. For example, the same concerns were in play when News Corp. sold the Dodgers to Frank McCourt. The owners, however, approved that deal.

 

If you’re a Cubs fan, there are reasons to side with Selig’s concerns. An owner saddled with debt means less money to use for player payroll. The Tribune Co., in an attempt to go out a winner and break a 100-year World Series futility record, has pumped loads of greenbacks into player payroll, much of it in the form of backloaded contracts. The new owners will be taking on a hefty player payroll commitment, as well as the Cubs sale debt.

 

What does that mean?

 

If you live and die by the Loveable Losers, pray hard that the Cubs win it all this year, or in the next few. It may be a while before the new owners have their cash flow situation under control so they can be as aggressive in the free agency market as they may want to be.

I don't really understand that. It seems to me that if the new owners are doing a rent-to-own agreement their initial cash outlay won't be that big. The problem is that at some point down the road (10 years?) they'll start to pay big. By that time the backloaded deals will be gone. It could hamper long term deals 5 years down the road though.

 

I don't know, I could be really off base here.

[CubinNY]

But doesn't Cuban have enough money to do the debt "sale" AND do whatever he wants with payroll?

Like most people Zell wants to avoid taxes so he's trying to have his cake and screw the people (the govt.) at the same time.