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November 20, 2006

The Ledger Domain

The Sale of the Cubs

by Maury Brown

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Within the industry, the Cubs are something of a mystery. They are the happy residents ensconced within the game's great jewel, Wrigley Field; they are seen by millions via WGN; they have money to burn. For all that, they've had little to show for it since 1908. They defy logic, spend like a drunken sailor on shore leave, pile up losing records, and nevertheless rake in revenues. Nowhere in professional sports has there been a team so consistently mediocre on the field, yet so consistently successful as a business over the last 20 years. The Cubs fly in the face of the conventional wisdom that winning fills the stands and losing keeps them empty.

Cubs stinking it up again this season? So what, a day at Wrigley is better than a day most anywhere else, fans say. The Cubs pulled in 3,123,215 in paid attendance last season, which, after expanding the seating capacity of Wrigley to 41,118, put them at 93.8% of capacity. Those same throngs got to watch a team that pulled up the rear in the NL last season, finishing 17 1/2 games out of first in the particularly weak NL Central. It's a case of the name "Cubs" exemplifying more than winning or losing, and as a product are more about attitude and environment. The Cubs are family--warts and all, they are beloved.

Last season, the Cubs led the league in spending the most and getting the least for their money. An Opening Day payroll of $94,424,499 garnered a 66-96 record. Parsing the data, consider this:

Marginal Payroll: $85,268,499
Marginal Wins: 17.4
Cost per Marginal Win: $4,900,488

That last figure was by far the most spent per win by any club in the league. Did injuries bite them? Yes. Did Dusty Baker hurt them? To an extent. Will this cause them to rethink matters and say, "Let's pull back and reevaluate?" Hardly. Beyond chasing Lou Piniella out of retirement, what this offseason has shown is that the Cubs will be spending more… a whole lot more.

Possibly as early as today, the Cubs will announce that they have signed premium free agent Alfonso Soriano to an eight-year, $136-million deal. To put this in perspective, Soriano will now have the fifth-most lucrative contract in baseball history, behind Alex Rodriguez ($252 million for 10 years), Derek Jeter ($189 million for 10 years), Manny Ramirez ($160 for eight years), and Todd Helton ($141.5 million for 11 years). This on top of Aramis Ramirez's five-year, $75 million deal, signing Kerry Wood to a one-year, $1.75 million deal that (with incentives) could jump to $6 million, and Mark DeRosa to a three-year, $13 million deal. Take that all in, and then try to imagine this kind of spending before Andy MacPhail left the organization.

Wood made all of four starts last season, and word is he'll be making the move into the bullpen. DeRosa hit .296/.357/.456, last season, but he's a career .273/.331/.404 guy. The Cubs played up the Ramirez deal like they were just handed a Thanksgiving Day turkey, but it was the product of Ramirez first opting out of the last two years of his four-year, $42 million deal with the Cubs; he was able to work an even more generous deal after a career season just in time for the lucrative 2006-2007 free agency period. Hendry's response?

"He proved to Chicago that when you leave $20 million or $30 million on the table, it's where you want to go," Hendry said. "Both sides gave a little bit at the end." But there's more to the deal than that, because Ramirez's contract is back-loaded. The contract starts at $8 million with a $5 million signing bonus for next season; from there, the numbers jump, to $14 million in 2007, $15.65 million in 2009, $15.75 million in 2010, a $14.6 million player option in 2011, followed by a $2 million buyout clause of a mutual option for 2012.

That brings us to the Soriano deal. There had been discussions about getting "Beltran money" for him this season, but at 30 years old, the deal he's reportedly inking with the Cubs is incredible. While the details have not been released, it's highly likely that the Soriano deal is backloaded in the same manner as the Ramirez contract.

As for how Soriano's numbers translate, his Wrigley Field numbers aren't that bad. His PECOTA for 2007 seems promising enough: .285/.335/.539, backed up by 34 home runs and a .287 EqA. There's been some talk that Soriano may wind up playing in centerfield; as Nate Silver said, "In the near term, that's pretty valuable if he can play a C/C+ center field. Maybe not $16 million a year valuable, but close in this market. In the long run, this deal is pretty unforgivable." Silver also added, "The decline in Soriano's rate statistics is actually are very mild, as the power/speed combo tends to age pretty well, but he'll likely be a defensively-challenged corner by the time he hits his Age 34 or Age 36 season, and the attrition rate hits 50% by 2011. Of course, there will still be three years left on the deal after that."

Given Soriano's age, you get a picture what appears to be the main crux of this wild spending spree this off-season for the Cubs: the Tribune Co. isn't concerned with what is going to occur with any long-term contracts. Why? Because the Tribune Co.--ergo the Cubs--is for sale. Once you factor in the Tribune Co. sale, one reason they would go after free-agent talent so aggressively after doing so poorly the year prior would be to take one last shot at the brass ring. This is the Tribune Co.'s last hurrah.

As Tribune Co. Sinks, Potential Owners Show Interest

If TribCorp only owned the Cubs, they would probably chain themselves to the club. Even though the club has been a failure as a baseball team on the field, over the 25-year stretch of corporate ownership, they have been laughing all the way to the bank. The problem is, the Tribune is a lot more than the Cubs. It's a media empire, and a crumbling one.

Tribune owns the Los Angeles Times and the Chicago Tribune, nine other dailies, 25 television stations--including WGN--WGN Radio and the Cubs. The sinking stock price for Tribune is attributed in large part to the pressures that the print media industry has been saddled with as of late: a sharp decline in circulation, which has lowered ad revenues. The reason? To some extent, print publications have been forced to cannibalize themselves through presentation of their content for free via their corresponding Web presence. Understandably, consumers would rather get their content for free via the Web than pay for it at the newstand.

Tribune is collapsing under its own weight. There have been tumultuous events at the LA Times (recently Dean Baquet, the Editor for the LA Times, quit after refusing to fire employees at the behest of Tribune), and pressure from the Chandler family, Tribune's largest shareholder, has forced Tribune to look into the option of selling the whole company, or possibly portions of the company, including the Cubs.

While the Cubs could be sold outright, it seems unlikely. Initial bids for the Tribune Co. in total were anemic, with offers below $30 a share. Even though Tribune's value is sinking, it is still the nation's No. 3 newspaper publisher in circulation, and No. 2 in revenue. The Tribune Co. has only put pieces, like the Cubs, up for bid in an attempt to raise the bid price for Tribune in-total.

Bidders for the Tribune Co. include Boston-based firms Bain Capital Partners and Thomas H. Lee Partners (who just purchased Clear Channel Communications), Chicago's Madison Dearborn Partners, New York-based Apollo Management, and Rhode Island-based Providence Equity Partners. Beyond the conglomerates, there are also Los Angeles billionaires Eli Broad and Ron Burkle. It is also possible that Gannett Co., the nation's number-one newspaper publisher, would consider gobbling up the Tribune as a strategic purchase.

To throw in other names for just the Cubs, Ernie Banks has show interest in the past, as has Dallas Mavericks owner Mark Cuban. The most recent random capitalist to have expressed interest in the Cubs has been industrialist and private-equity investor Thomas Begel, in company with 15 others; Begel is the founder of TMB Industries. The others are Lou Weisbach, the founder of Ha-Lo Industries (he has about a dozen investors), and Don Levin, the owner of the Chicago Wolves minor-league hockey team.

While Cubs Continue to Lose, the Club Remains a Rare Value

In 1981, the Tribune Co. purchased the Cubs for $21 million dollars, or approximately $94 million in today's dollars (accounting for inflation). Forbes valuates MLB clubs every April, and by their calculations, the "Loveable Losers" were valued at $448 million-a 12% increase in value from the year prior-ranking them the fifth most valuable club in all of MLB at the beginning of the 2006 season, behind only the Dodgers, Mets, Red Sox, and Yankees. In recent history, the Cubs have been a climbing to the top of the industry finanancially. From 2000 to 2005:

image 1

Yet, during the period of Tribune ownership, the Cubs have amassed a weak .476 winning percentage, having only won the Division three times, finished second once, third three times, with a heavy dose of fourth-, fifth- and sixth-place gutterballs to round out the 25-year stretch. Yet, as I mentioned at the beginning of this article, the Cubs fly in the face conventional wisdom, because despite the losing, the Cubs continue to be a popular draw:

image 1

While the team was posting a .476 winning percentage over the entirety of Tribune ownership, Wrigley has been at 73 percent of capacity, and that's getting better of late. For the past decade, they have averaged 2,769,503 fans, or 87 percent of capacity, while posting a .473 winning percentage. Since 2000 they have averaged 2,945,438 fans annually, or a stunning 93% of capacity while holding a .478 winning percentage. Since 2004, the Cubs have drawn over three million fans per season, running at 100.61%, 98.38% and 93.77% of capacity. Last year's percentage of capacity was especially impressive, as the seating capacity of Wrigley was bumped up to 41,118 and the club posted the aforementioned train wreck of a season.

Valuing the Cubs Against Recent Sales

While Forbes values the Cubs at $448 million, the recent sale of the Washington Nationals and the pending sale of the Atlanta Braves will most assuredly push the value of the Cubs higher. The Nationals recently sold for $450 million, and by all indications, the Braves will be sold by Time Warner to Liberty Media for approximately $600 million. Despite the losing, the Cubs are a solid investment for two primary reasons: Wrigley Field and superstation WGN (if acquired in conjunction with the club). The Cubs have incredible resilience compared to other franchises in the sense that they are almost exclusively unaffected by continually losing. They have incredible fan loyalty nationwide, and are ranked behind only the Yankees, Red Sox and Braves in brand recognition. In part, this is the benefit of cultivating a nationwide fan base through WGN's longevity as a superstation. Given these factors, and in anticipation of continued revenue growth, the Cubs could fetch $600-$650 million as a stand-alone sale.

The Last Hurrah

The question is, will this insane free-agent spending spree have the capacity for adverse effects? After all, if history has shown us anything, it's that throwing money at player payroll isn't a recipe for winning. There are large questions surrounding the Cubs, starting with the pitching staff. Jim Hendry now sits front and center after the retirement of president Andy MacPhail and the ouster of Dusty Baker. If the Cubs fail this season, the blame will have to rest on Hendry's shoulders. These contract deals, associated with a lackluster season, could have some negative impact to the overall value of the club at the time of the sale. Will the allure of owning the Cubs cause some Pavlovian state where prospective owners, drooling at the thought of owning one of the most widely-recognized brands in MLB, end up overlooking these new contracts because they're instead looking at franchise value projections and the healthy dynamic in place with a new CBA just reached? That seems to be the gamble. After all, it's not as if there isn't an ego factor involved when billionaires ponder purchasing sports franchises.

What is clear is that the Cubs will soon have their ninth owner in the club's illustrious history. The ultimate question will be whether the Tribune Co. goes out with a bang. It remains to be seen whether that bang is associated to winning the World Series, or is just more of the same continued head-pounding against the wall.

Maury Brown is an author of Baseball Prospectus. 
Click here to see Maury's other articles. You can contact Maury by clicking here

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