Best of BP: MLB’s Presentation to MLBPA Impugns Trust

This article was originally published on May 18.

Over the weekend—hey, nobody does anything on Saturday nights anymore anyway—the Associated Press reported that MLB, in a presentation to the Players’ Association, claimed that paying player prorated salaries, as was agreed in late March, would “contribute to an average loss of $640,000 for each game over an 82-game season.”

The league prepared a 12-page document entitled “Economics of Playing Without Fans in Attendance,” dated last Tuesday. AP reported on the document, which I haven’t seen. So I’m going on the AP report. The reporter. Ronald Blum, is a good one, so I have confidence that he got it right.

I’m going to list a lot of problems with the MLB analysis, so let me get this out of the way. Some of you are going to accuse me of being anti-capitalist. I had a career on Wall Street recommending the stocks of for-profit healthcare companies to mutual funds, hedge funds, and pension funds. I’m as capitalist as they come. But one of the things I learned on my job was that you should never, ever, take anything management says at face value. I’m going to analyze this as I would any company document.

You’ll recall that back in March, MLB and the MLBPA agreed that, in case of a shortened season, players would receive prorated salaries. If the league plays half of the 162-game schedule, the players would get half pay. If there are 100 games, they’ll get 100 / 162 = 62 percent pay. That sort of thing. But the owners want to renegotiate the terms, given that the current plan is to open with nobody in the stands. I’m not going to comment on that, or the wisdom of holding a season. I’m just looking at the league’s presentation. I’m going to divide this into three issues.

The Big Picture. Something jumps out here. As I’ve written, the gold standard for public information is the report compiled annually by Mike Ozanian at Forbes. We can compare some of the league’s numbers with the Forbes numbers.

• Revenue breakdown: Forbes 30 percent gate, 30 percent national media, 21 percent local media, 10 percent sponsorships, nine percent other stadium revenue. MLB: 39 percent gate and other stadium, 25 percent central league revenue (including national media), 22 percent local media, 11 percent sponsorship. Close enough.
• Projected revenue for 2020: Forbes doesn’t make projections, but pegged 2019 revenues at $10.5 billion, up from $10.3 billion in 2018. MLB: Projected revenues of $9.967 billion, including $7.548 billion at the local level. Both of those are fishy. Half a billion dollar drop from 2019? And the local number can’t possibly be right. Per MLB’s figures, teams get 39 percent from the gate and other stadium and 22 percent from local media. That’s 61 percent. Multiply that by $9.967 billion and you get $6.08 billion, not $7.55 billion. Maybe it’s just a math error, not that that’s a confidence builder.
• Player salaries: Not in the Forbes analysis but MLB payrolls were about $4 billion last year. MLB says it projects $4.366 billion. Did you see MLB salaries appreciate by more than nine percent this winter? Me neither.
• Cash flow: Again, this is not something Forbes projects, but it always includes earnings before interest, taxes, depreciation, and amortization (EBITDA). In 2019, EBITDA was $1.50 billion, up from $1.19 billion the year before. According to the MLB, EBITDA has been within $250 million of breakeven every year since 2010.

Hold on. MLB says teams generate operating income of $250 million? Forbes says it’s more than six times as high. The onus is on MLB to explain where that $1.25 billion went. I can understand a difference of a few million. But over a billion?

The Details. The AP article lays out the hits that MLB anticipates. Local media revenue would drop proportionately, the league says, from $2.3 billion to $1.2 billion. That seems right, assuming teams are paid for only live games, not the archived ones we’ve been watching since March. A $1.1 billion hit.

But salaries, projected by the league at $4.366 billion (which, again, seems high) would fall by $2.156 billion, to $2.21 billion. MLB uses a higher figure of $2.36 billion that includes prorated signing bonuses, termination pay, and buyouts of declined options. Prorated signing bonuses are noncash and the other items are sunk, not ongoing costs.

MLB is projecting “overall local revenue” of $1.23 million per game. Multiply that by 1,230 games and you get $1.51 billion, $1.2 billion of which is local media. They had expected local revenues of $6.08 billion. So that’s a $4.57 billion hit.

Then there’s national media money and sponsorships. Those, per MLB, account for 36 percent of revenue. For a $10 billion business, that’s $3.6 billion. MLB expects $1.79 billion for national media in an 82-game empty-stadium season. Cut sponsorship by 80 / 162 and they lose $543 million.

So here’s the tally:

$billion	162 Games	82 Games	Change
Local revenues	6.08	1.51	(4.57)
National TV	2.50	1.79	(0.71)
Sponsorship	1.10	0.56	(0.54)
Player salaries	4.37	2.21	(2.16)

I didn’t add those up, for a reason. MLB wants to renegotiate with the players because of empty stadiums. They had projected local revenues of $6.08 billion. Of that, $2.3 billion was going to be local media, so they were expecting $3.78 billion of other local revenue, primarily from fans going to games. That $3.78 billion is now projected to fall to $314 million. But the March deal, with prorated salaries, implied a drop to $1.91 billion in the event of an 82-game season, and MLB was OK with that and the other reductions to revenues (and the bottom line). Now they’re saying that empty ballparks are a game-changer. Really? Compared to the Arizona/Florida plan, with fans attending games in spring training facilities, when they were floated? What would local revenues havebeen under those circumstances? Half of what MLB had budgeted for a normal 2020 season in MLB parks? A quarter? Less? How much worse is MLB saying an 82-game stadium played in front of nobody will be compared to games in spring training facilities? A few hundred million?

All told, MLB’s 12-page document points to a reduction in revenues (and therefore, profits) that is steep in the event of a shortened season. But that’s primarily due to a shortened season. Playing in empty stadiums increases the reduction by relatively little compared to prior plans. Most of the revenue hits were going to happen whether or not there were fans in the stands.

The Nitpicks. These seem minor, but I’m building to something.

• MLB goes into detail about the $787 million it earns from postseason broadcasts and the financial risk if a fall rebound cancels the postseason. That’s true, but it’s not germane to a discussion of regular-season player salaries. If there’s no postseason, no players get paid.
• At the beginning of the year, MLB projected “EBIDTA” of $143 million “after stadium depreciation and noncash addbacks.” It doesn’t work that way. EBITDA is earnings before depreciation. And it might be before the noncash items too, depending on what they are.
• MLB projected free cash flow of -$95 million “after mandatory principal payments.” Free cash flow is before principal payments.
• MLB lists losses by team, leading with $312 million for the Yankees. But that figure (1) doesn’t include national revenues (media, sponsorship) and (2) includes $100 million for repayment of bonds that financed Yankee Stadium. Payments to retire debt are not considered expenses, so don’t contribute to losses.
• MLB says that teams will raise their debt by $2.1 billion this year. That’s because they can. With the exception of a few clubs—you and I could count them on the fingers of one hand—any team that requires capital could simply get an equity investment from its ownership group. They use debt financing because interest rates are low. Besides, if a team borrows in order to build condos, hotels, and shopping on the land surrounding its ballpark, that’s an investment, not a hardship.

The reason these nitpicks are important: they portray MLB as sloppy, ignorant, and/or deceptive. It doesn’t matter which one. MLB is a private company and is not subject to the same reporting requirements as the companies that I followed. But how comfortable would you be negotiating with a party that makes representations like these? When it claims that it made one-sixth the income in 2019 that a reputable third party has reported?

You can get away with this sort of thing if you’re doing PR. It’s unacceptable in a negotiating document. The presentation that AP reported is full of omissions and misinformation. It’d be rejected by the professional investors I knew. Presumably, the MLBPA will have the same reaction.