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September 24, 2012

Bizball

Astros Will Use Money to Pay Down Debt, but Is That a Bad Thing?

by Maury Brown

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Back in August, I asked, How Low Can Jim Crane Go?—a reference to Houston’s player payroll. In the article, I tracked how the club has been dramatically cutting player payroll in recent months. Since then, there has been more cutting, a continued emphasis on player development (congrats to our BP colleagues Mike Fast on going to Houston and Kevin Goldstein joining him as Pro Scouting Coordinator), and increased revenues that will be available via Comcast SportsNet Houston. The team (along with the Houston Rockets) will own just over 77 percent of the network and will receive an annual $26.28 million raise, beginning in 2014, on the $23.72 million they  currently receive as part of the league’s national television contract.

The Astros are approaching the end of their second consecutive 100-loss season, and a move into the AL West next season (where the bar for spending has been set high by the Rangers and Angels) means continued losing is likely for the foreseeable future. Since that article of mine in late August, a number of sources close to the club have said that there are have been grumblings within the organization regarding how the increased television revenues will be used.

The Astros will not emulate the Marlins, spending lavishly in free agency the second new money arrives at their door. Instead, sources indicate that the club will choose to pay down debt rather than put it toward free agent player contracts. After all, Crane took out a $220 million loan from Bank of America and a $55 million loan from the league facility fund to assist in his purchase from Drayton McLane. The $220 million loan was one of (if not the) first post-recession sports loan, so it was conservatively structured and highlighted that, in this day and age of sports franchise sales, everyone will have debt in one form or another.

So, is this a “bad thing?” Is paying down the debt rather than putting toward on-field personnel the wrong thing to do? First off, there are no rules forbidding the use of television revenues to pay down debt (as an aside, it is against the CBA to use revenue-sharing to pay down club debt, but that’s not the case here). There have been some references to former Texas Rangers owner Tom Hicks and former Dodgers owner Frank McCourt, who recently sold the franchise amidst controversy, but Crane’s situation is much different. In the case of both Hicks and McCourt, the two had fallen into bankruptcy and then wanted to use television rights fees to bail them out. In the case of Crane, he sees a club that is on the wrong side of the amount of revenues going toward player payroll, not getting a return on those players, and deciding that it’s better to strip it down to the axels and build it back up.

In speaking with a senior league official, even after the trimming of player payroll the last couple of seasons in advance of the sale to Crane, I’m told the Astros put 55 percent of their revenues this season toward player payroll. According to the source, that 55 percent is higher than the league average.

That begs the question, “Is it really worth spending the new revenue in free agency given that the club will be rebuilding?” One could easily argue that it’s not. For a club in this position, spending for the sake of spending makes no sense. Houston is clearly looking to develop young talent through the draft and trades, so you could use the analogy that it would be like spending $10,000 on a new bathroom in a 500-square-foot fixer-upper home. Sure, it increases the value some, but until you make the entire house more valuable, it’s not going help.

In turn for paying down the debt, the Astros will be in a better position to be active in free agency once player talent is developed and beginning to mature. The problem for (some) fans is that this process will take time, which means that the Astros will not be in the best position to be competitive next season… and possibly longer. As the senior league official said, however, “Paying down the debt now gives flexibility in the future when player talent is where it needs to be. Educated baseball fans should see that that direction makes sound baseball sense in the long term.”

Indeed, there is some precedence for this. The Pirates had been trying to slowly wean themselves out of bad free agency contracts, and when Frank Coonelly came over from the Commissioner’s Office to be president at the end of the 2007 season, it was finally decided that blowing the roster up and starting over via player development was more prudent. Today, the Pirates are two games under .500, which gives them a chance for winning 2012 season. That is certainly an improvement over last season—the team was 17 games under .500 at this point in 2011—and has the team headed in the right direction.

While the Astros using the new revenue to pay down debt doesn’t help the team now, it will in the future. In the meantime, the club jumps to the American League next year, and Mike Fast and Kevin Goldstein will be part of Jeff Luhnow’s plans, which will also include hiring a new manager. That appears to be nearly in the offing, if reports are true. Whoever the new manager is, he’ll be working with a lot of fresh talent. That might make things painful now, but one can argue that it will help the team in the long run. How “long” is long, is the question.

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

Related Content:  Jim Crane

17 comments have been left for this article. (Click to hide comments)

BP Comment Quick Links

btrostelsc

From what I've seen, educated Astros fans are absolutely on board with the bottoms-up rebuild. However, uneducated fans are getting louder by the day. Crane, Luhnow, and the rest of the team might want to invest in a quality set of ear plugs; they're going to need them.

Sep 24, 2012 06:16 AM
rating: 1
 
tannerg

I don't know if they're "uneducated," but the Astros fans I know make the point that a single-franchise metro area with over 6 million people shouldn't have a team this bad.

Houston rebuilding like this is somewhat different than Kansas City or Pittsburgh doing it.

Sep 24, 2012 07:58 AM
rating: 3
 
btrostelsc

I can agree that Houston shouldn't have a historically bad team, but given the state of the franchise at the moment a rebuild is the only solution.

Many of the complaints I see are of the "should of kept" variety, when in reality retaining the players Houston has traded off the last three seasons would likely still leave the Astros as a 75-80 win team. That might be have been more palatable to some fans, but it's a pointless exercise for the franchise.

Sep 24, 2012 08:51 AM
rating: 1
 
CRP13

This is exactly right. If you go to Astros-centric sites like crawfishboxes or astroscounty, you'll see general agreement that indiscriminate spending on the Jayson Werths and Barry Zitos of the world is not a good idea in the near future.

But if you go to the Houston Chronicle site or to astros.com...wooo. You'd learn that bringing back Berkman, Oswalt, and Pence would turn the Astros into a World Series shoe-in. Because, goodness knows, those three guys are more talented than anybody in the AL West.

Sep 24, 2012 09:10 AM
rating: 0
 
buffum
(458)

> You'd learn that bringing back Berkman, Oswalt, and Pence would turn the Astros into a World Series shoe-in. Because, goodness knows, those three guys are more talented than anybody in the AL West.

Of course, Oswalt is IN the AL West ...

Sep 24, 2012 10:13 AM
rating: 2
 
CRP13

exactly

Sep 24, 2012 11:47 AM
rating: 0
 
jedjethro

The Pirates are headed in the right direction? I think the verdict is still out on that. Saying they "are two games under .500, which gives them a chance for a winning season" is putting an awfully nice spin on their late-season implosion.

I think the verdict is still out on the new Astros ownership. I really like the new GM's track record with the Cardinals, so I'm willing to jump on board with him for the next several seasons and see what happens.

The new war profiteer owner? Not so much. I like his call on Luhnow, but he has a pretty fine line to walk in my opinion.

Sep 24, 2012 06:32 AM
rating: 2
 
jfranco77

In terms of their financial situation, yes, they are headed in the right direction.

In terms of the on-field product, the jury is still out, but their donation to the Astros in the Wandy Rodriguez trade doesn't look like it's going to help.

Sep 27, 2012 09:29 AM
rating: 0
 
mrenick

I think this is exactly how the rebuild should be handled. However, it does look like Crane will need to spend some of that money on PR and keep the fans in the loop as to the organizations rebuilding philosophy. A little but of money thrown in that direction might payoff down the road. I don't think an organization really wants to lose a large portion of its fan base while rebuilding. Especially, while the other in-state team is currently one of the best in baseball.

Sep 24, 2012 06:45 AM
rating: 1
 
jedjethro

This also. Throwing money around a la the Cubs or Dodgers on crazy contracts is one thing. But having an absolute no-name roster that loses 100 games 3 or 4 seasons in a row while having the Rangers lay claim to 75 percent of the state is another.

Sep 24, 2012 07:02 AM
rating: 2
 
BillJohnson

A fair enough point. There are two ways of dealing with the no-name problem. One is to go out and sign "name" players, which is exactly the pitfall that CRP13 points out above. That doesn't work well if the team behind those two or three "name" players is bad.

The other is to cultivate some "names" among what they've got, and here Luhnow may be able to help. Literally for decades now, the Cardinals have had a very effective "outreach" program into the St. Louis metropolitan area (which needs all the "outreach" it can get...), which must have helped maintain their famously loyal and rabid fan base. Luhnow is a shrewd enough guy to have seen this and understand how it helps. An aggressive effort to "sell" some of the more interesting and charismatic players via outreach programs seems likely, and it may do more to address this problem than adding a couple of big names to a team that will just drag them down. They'll have the resources to do that, and a much larger community to engage in the outreach. All told, the no-name problem strikes me as solvable.

Sep 24, 2012 09:44 AM
rating: 1
 
IvanGrushenko

Who are these "interesting and charismatic players"?

Sep 24, 2012 10:52 AM
rating: 0
 
BillJohnson

I'd start with Jose Altuve, who qualifies on both counts, and go from there.

Sep 24, 2012 11:25 AM
rating: 4
 
misterjohnny
(925)

But will Comcast SN HOuston get any coverage from anyone other than Comcast? Houston Rockets did not make the playoffs last year and likely won't this year. The astros lost 100 games this year and likely will next year.

Do the astros get money from CSNH regardless of whether carriage contracts are signed?

Sep 24, 2012 10:58 AM
rating: 0
 
DrDooby

Just imagine how the pressure regarding the Mets is compared to this.
Owners barely clinging to their franchise.
20+ years of growing accustomed to shortterm thinking and - often ill-fated- quick fixes until 2011.
Yet, already extreme uneasiness with a rebuilding under extreme cost-cutting measures during vast parts of the fan base.

How lucky the Astros seem compared to this.

Sep 24, 2012 13:08 PM
rating: 0
 
Eddie Bajek

Hmmm... to ensure future financial security faced with no realistic option to increase revenues, the option was to pay down debt? Novel concept...

Sep 24, 2012 13:30 PM
rating: 0
 
Johnston

IMO paying down the debt is a very wise move.

Mar 21, 2013 09:04 AM
rating: 0
 
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