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I was going to write about the debt that the new Marlins ownership incurred in buying the team, and how that’s not a good excuse for the fire sale they’re conducting. In doing the research, though, I came upon something amazing. It’s amazing to me, at least. Maybe to you, too. Namely: There’s a hedge fund that makes out if the Marlins make money. They make out if the Marlins break even. And they make out if the Marlins lose money. You’ve gotta like those odds.

Here’s the financing for the Marlins purchase, per Forbes:

  • $800 million cash (including $90 million of preferred stock)
  • $400 million debt (all assumed from prior ownership, $300 million being refinanced)

In addition, ownership has pledged the team’s proceeds from MLB’s sale of BAMTech, roughly $50 million, and an additional $50 million to cover future losses.

I was going to look into the debt, but the preferred stock caught my eye. Preferred stock is a type of stock that some companies issue. The most familiar type of stock is common stock. If you buy 100 shares of Apple, for example, that’s common stock. Preferred stock is a little bit different. Preferred shareholders can’t vote on corporate resolutions; common shareholders can. Preferred stock almost always pays a dividend, and its dividend must be paid before common shareholders can get a dividend. And in the case of a bankruptcy, preferred shareholders’ claims to the company’s assets (after employees, suppliers, lenders, and others are paid) are superior to those of common shareholders. The preferred moniker derives from the latter two points.

The preferred stock is from MSD Partners, an investment fund controlled by Dell Computer founder Michael S. Dell. In other words, MSD handed Marlins ownership a check for $90 million, and in return it received preferred shares. The shares have two features that I think are pretty interesting:

  • The dividend rate is 14 percent.
  • They are puttable in 2020.

Let’s go over those one at a time. The 14 percent dividend rate is—at a time when 30-year Treasury bonds are yielding under three percent, money market accounts are below 1.5 percent, and the interest rate on your checking account starts with a zero and a decimal point—well, it’s pretty high. Really high, in fact. A big real estate investment trust, Ashford Hospitality Trust, recently issued $85 million in preferred stock, and the yield on it was 7.5 percent, just over half of what MSD is getting from the Marlins. The Marlins are paying MSD $12.6 million per year for that $90 million investment.

When a security is puttable, it means that the owner has the right to sell it (“put it”) back to the issuer at a set price. In the case of MSD’s preferred stock, they can put it back to the Marlins in 2020. And they’ll get their $90 million back. Fair enough, right?

Well, here’s the catch: If the Marlins can’t come up with the cash, they must give MSD common stock in lieu of cash. Now, if the Marlins have turned things around in three years and are printing money (cough), they’ll pay off MSD. What if they’re barely breaking even or, as seems very possible, losing money? Then MSD will get their $90 million in the form of stock.

Currently, MSD’s $90 million investment represents $90 million / $800 million = 11.25 percent ownership of the Marlins. Let’s say the Marlins lose $75 million during the next three years, over and above the amount offset by the BAMtech sale and the $50 million ownership has in reserve. That’ll reduce the value of Marlins from $800 million to $800 million – $75 million = $725 million. But MSD is still owed $90 million. So the $90 million in common stock they’ll receive would represent $90 million / $725 million = 12.41 percent ownership of the Marlins. They get a bigger share of the Marlins because the Marlins lost money! The more money Miami loses, the bigger MSD’s share.

So there are three possible outcomes for MSD:

  • They hold their preferred shares and just keep banking those 14 percent dividends for as long as they want. That is a really, really good return.
  • If they have a better use for the $90 million, and the Marlins have the cash, they can exercise their put in 2020 and get their investment back, after having received $37.8 million in dividend payments.
  • If the Marlins are struggling, with continued losses and cash getting tight, as they claim it is now, MSD can turn its 11.25 percent ownership of the club into a bigger stake, again after having received $37.8 million in dividend payments.

There’s really no way MSD does badly. Marlins ownership can lose money. Marlins players are stuck with a team that’ll probably be dreadful. Marlins fans have to watch a club without Giancarlo Stanton, Marcell Ozuna, and Dee Gordon (so far). But MSD makes out no matter what. Short of a complete bankruptcy and liquidation (which MLB won’t let happen), MSD will collect big dividend checks for as long as it wants. And after three years, it can cash out (if things are going well for the team) or turn its initial investment into a bigger slice of the ownership pie (if they aren’t).

It appears that the current state of the Marlins doesn’t make Derek Jeter, or J.T. Realmuto, or Marlins fans happy. But pretty much anything imaginable will work out just fine for the hedge fund that comprised just 7.5 percent of the franchise’s total price tag of $1.2 billion.

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RotoLando
12/20
Derek Jeter is now The Man. Not in the fun, "you da Man!" sense. In the long time nemesis of Homey the Clown sense
Alan Waxman
12/20
Nice article. I clicked through to the Forbes articles to find out more because it didn't make sense to me why the Marlins ownership group would want to do this and why MLB would allow it. Forbes didn't understand the rationale either. Was the Marlins ownership that hard up for cash - and if so then why did MLB let it proceed? This has the makings of a disaster for Marlins fans - a crappy team on a shoestring budget for the foreseeable future. One that handed over Stanton to the Yankees for nothing. As a Mets fan, I'm still upset that the Wilpons weren't forced into the Einhorn deal.
Rob Mains
12/20
Thanks, Alan. Re the Mets, the Einhorn deal was more egregious, more concentrated, and involved a more controversial investor than MSD. Even if we assume a doomsday scenario--the Marlins lose hundreds of millions--MSD won't acquire a majority stake (nor does it want one, I think). I'm more surprised MLB countenanced the 14% coupon than the potential ownership grab arising from the put.
Alan Waxman
12/20
Yes, the 14% coupon is what I'm surprised MLB allowed. I don't think MSD wants an ownership stake, they are more likely after a guaranteed payout on very favorable terms. And while the Einhorn deal absolutely was more egregious, it would have forced the Mets out of the hands of the Wilpons - a win for Mets fans.
James Eneix
12/20
excellent article. this kind of financial wheeling/dealing goes on among the rich all the time. rich getting richer without having to do the minimum to put a decent product on the field. if the marlins were a car, it would be taken off the road and the manufacturer would be out of business. instead...
jfranco77
12/20
I keep hearing "there were other offers" - so presumably MLB didn't approve this out of desperation to get the Marlins out of Loria's hands. Unless all the other offers were worse. I'm starting to think MLB really wanted the Jeter-backed offer for the presumed good publicity. Oops.
Rob Mains
12/20
I assume they just approved the offer for the most money. That's pretty much how the Commissioner's Office rolls these days.
James Groves
12/20
Strong deal, but they're not getting paid that 14% annually in current return. Typically the preferred only pays to the extent cash flow is available to pay it. If not, they accrue. Since the Marlins are unlikely seeing positive cash flow in the near term (maybe at all?) I would assume MSD is going to accrue that 14% until a liquidation scenario or if they force it via the put. The fact that they took the MSD deal tells me that they don't expect to be able to pay a traditional or high yield bank note. These teams are terrible cash flow bets but value continues to climb because of TV contracts, favorable stadium leases, etc. MSD expects that even if the team management is horrible, somebody (perhaps them) will buy it for something greater than their valuation.
James Groves
12/20
I also think back to the Cubs acquisition in 2009, which was very complex given that the Tribune Co was selling the team out of BK. Few people know the full facts, but supposedly there was more traditional bank debt involved. According to Bleacher Report, there is a rule in the Collective Bargaining Agreement that states: Collective Bargaining Agreement, there is a rule that states: "No Club may maintain more Total Club Debt than can reasonably be supported by its EBITDA. A Club’s Total Club Debt cannot reasonably be supported by its EBITDA if Total Club Debt exceeds the product of that Club’s EBITDA during the most recent year multiplied by the EBITDA Multiplier applicable to that Club."
Rob Mains
12/20
I wonder how much wiggle room there is in that EBITDA covenant both in terms of the multiplier and the definition of EBITDA.
James Groves
12/20
A lot...EBITDA can be manipulated pretty easily
Rob Mains
12/20
The Forbes article didn't indicate whether it was a cumulative preferred, but of course it wasn't exactly an offering document. You might very well be right, James. Agreed that the upside is on the next sale.
Rob Mains
12/20
One of the reasons I don't understand the 14% is that there will NEVER be a liquidation scenario. MLB won't allow that to happen. That should reduce the risk premium a good chunk.
James Groves
12/20
Liquidation was probably a poor choice of words, let's go with Exit. Exit in the VC sense
Rob Mains
12/20
Yep, that works. And agree completely on ebitda; it's why I wrote recently that even if sports teams were public, I wouldn't trust the financials.
Michael McKay
12/20
I teach graduate level finance courses in Private Equity. FWIW -- the fundamental assumption in your assertion is that "sports teams valuations only go up over time". That has been the history of MLB and other professional sports leagues. But -- those valuations have very little to do with the cash generating ability of the franchises (as noted below). As we saw with the housing crisis, the history of "prices only go up" can change quickly and sharply. And if there aren't underlying cash flows -- your "can't miss" investment can evaporate. 14% coupon on the preferred feels like market rate to me given the underlying leverage and cash generating ability of the business. Value decoupled from cash generation is a highly risk "investment". (PS -- don't let my counter-opinion take away from what is a great piece of reporting -- keep it coming!)
Rob Mains
12/20
Hey Michael, thanks for commenting! Agreed that the underlying assumption is one of asset appreciation, and while that doesn't always hold, it does underlie a lot of illiquid investments. Early this year, in discussing the Marlins, I made the analogy to one of the pieces of art that made Loria rich--you pay a lot for the investment, you experience negative cash flows, then you recoup everything and then some on the sale. Same with land, precious metals, even equities with no dividend. Zero or negative cash flows, all the value in capital appreciation. And given that MLB effectively establishes a floor value by implicitly guaranteeing that there can't be a bankruptcy, 14%, even for equity, seems rich to me, even for a pretty small slice of the overall financing.
Alan Waxman
12/21
The thing is... we have a rather long track record and valuations always go up. That said, I feel that the Marlins sale price was an overpay. And I agree with Rob that I can't see a scenario where the MDS investment doesn't wind up paying off.
Ryan Sullivan
12/20
Phenomenal article Rob - Love when you bring your business background to the baseball column.
Rob Mains
12/20
Thanks my friend.
jupiterjoe27
12/21
curious if you've confirmed with anyone at MLB, the marlins or MSD that it is convertible into equity. has there ever been a hedge fund approved as an owner of a pro sports team? leagues are so tight on ownership, i can't see how they would allow this, and if they wouldn't approve them as an owner, they wouldn't approve them for an instrument that converts into equity. i know forbes reported this, but they also reported that the cuban guy bought the team, so i'm not sure they are the authority on this. also, on your initial point, is it the debt that led to the fire sale or the losses? lots of pro teams have debt and it doesn't lead them to sell all their players. i thought the marlins issue was they had a 77 win team that lost a bunch of money with many contracts with big increases in the future. so their options were: 1) keep winning 77 games with even higher losses, 2) spend on pitching, lose even more money and hope you can improve the 15 games necessary to make the playoffs or 3) clean house and try to start over. not exactly a great set of choices, but point being their options were driven more by the losses than the debt.
Rob Mains
12/22
Forbes reported on the convertible equity piece *twice.* I frankly have no idea whether a fund is an owner of any other sports franchises; keep in mind that this is (for now) only an 11.25% non-voting interest. As for the team, it seems to me that since management obviously closely examined the books, they knew that they'd be incurring losses (whether through operations or debt) if they wanted to keep the team intact, so they could've adjusted their bid and funded the losses. I really don't think operating income is a driving force for sports team owners; look at the Detroit Tigers. I've seen people draw an analogy here to what happened in Houston but Houston did not have players with the talent of Stanton or the team-friendly contract status of Ozuna when they did their teardown. Plus, of course, the Marlins play in a weak division whose lone good team is going to lose its best player after the season.
jgtx2018
12/23
Apologies for what's prob a redundant comment, but as a layman I'm failing to grasp why the deal was done on the Marlins end. Was the final $90 million that insurmountable? It seems nuts to be able to get together 710m, then take on these seemingly onerous terms for the last 90m.
Rob Mains
12/24
Not redundant, and a good question! Answer: Beats me. We don't know the interest rate on the loans. If they're really high, like double digits, then the 14% rate is somewhat understandable. But I agree that they seemed to have paid a steep price for that last $90M. Ownership might be highly confident that MSD will put their shares in 2020, and that they'll have cash on hand to cover it. But it does seem risky, from ownership's perspective.
jupiterjoe27
12/25
perhaps the terms are not actually as onerous as forbes reported
Steve Chandler
12/31
Outstanding article Rob. I always enjoy your business side of baseball articles.
Adam Cox
1/26
Great article--and some of the most informed comments I think I've ever read. Thank you Rob and everyone else!