- The Washington Times - Sunday, July 14, 2002

Sports Biz

Major League Baseball Commissioner Bud Selig is standing in the crosshairs of disbelief once again.
Already not widely trusted, Selig last week sounded another confusing economic alarm, saying one team might not meet payroll tomorrow and another may not stay solvent through September. But then a day later, he dispatched his lieutenants to modify his statements.
"Sometimes solutions to a problem quickly present themselves," said John McHale Jr., MLB vice president of administration. McHale said the club in question of missing payroll, believed by industry sources to be in a group that includes Detroit and Tampa Bay, will meet its obligations. "But I expect that as the season progresses, we will have more teams with these kinds of [financial] issues."
This is the sort of back-and-forth shell game baseball has played for more than a century. Even in the 1880s, owners routinely warned of impending bankruptcy and then soon shuttled off to add the latest star du jour. Contracts today have many more zeroes at the end of them, but the core concept is the same.
But there is one key group that firmly believes Selig this time: the lenders who lend MLB and the individual clubs money. MLB has already extinguished a $1.4 billion line of credit with Fleet Boston Financial Corp. and Bank of America Corp. Total MLB debt is about $3.5billion, Selig says. The sport for some time has not been able to borrow money on the types of favorable terms enjoyed by the NBA and NFL. And baseball's primary lenders likely face more trouble syndicating their MLB loans out to additional lenders, a common practice among most large and corporate borrowing.
You add that gloomy outlook to Wall Street continuing to reel in the wake of one corporate accounting scandal after another, and the result is a well of money for baseball drying up.
"We're potentially looking at a very serious situation," said Sal Galatioto, managing director of the sports industry practice at Lehman Brothers Holdings Inc. The firm lends money to baseball teams but is rather selective in which accounts it takes on. "I can't imagine anybody going under on Monday, but these are not the good ol' days anymore. We have the possibility of another strike looming. The general state of the economy is not good. If you have a team that already is losing a ton of money, I don't know how you necessarily do another debt deal.
"And why would Selig say that for labor posturing? If it's not true, at least in some way, he loses any real leverage."
Selig overstated the immediate urgency of baseball's financial crisis, but what he also did was highlight some glaring weaknesses in the economic underpinnings of baseball.
In short, the sport's meteoric revenue growth of the last decade is now beginning to end. Attendance is off about 6 percent so far this season. Average ticket prices grew this season at their smallest annual rate since the players strike of 1994-95. The bidding bonanzas for national network TV rights are becoming a thing of the past. Most major league teams are set with new stadiums for the next generation. And getting help from a large stadium naming rights contract is also a tougher proposition these days.
"It's a supply-and-demand situation, and Selig's comments may make some lenders question whether to lend to the industry," said Aaron Barman, sports investment banker with Macquarie Bank Ltd., to Bloomberg News.
So does this mean baseball fans immediately should side with the owners as labor negotiations continue with the players? Yes and no. On one hand, some of the revenue sharing proposals offered by the owners could help with competitive balance that so many fans want and enjoy in other sports, provided those shared funds are funneled back into team operations in some meaningful way.
And players, though they would be considered unsecured creditors in any team bankruptcy, still have contracts that are far more guaranteed than any owner profits.
But it also remains to be seen whether the owners' platform is truly intended to improve the landscape of baseball or directed at simply beating back the players after they have rolled up an 8-for-8 winning streak in labor disputes.
In the meantime, baseball is also tightening its belt internally. An old rule called 60-40, mandating teams cannot have debt higher than 40 percent of their franchise values, is now being enforced by Selig with renewed vigor.
This is also the source of considerable debate in the labor talks, as union leaders believe the system could allow for an artificial drag on salaries. And some of the accounting in the 60-40 rule, such as simply estimating franchise values as twice the level of team revenues for 2001, is more than a little arbitrary. But regardless of the intent of 60-40's application, it does show some sense of baseball trying to come to grips with its debt problems.
Despite baseball's ongoing fiscal troubles, some optimism does remain in the financial community. Just as history tells us that the sport cannot go through labor negotiating without a work stoppage, history also tells us that baseball has recovered from the brink of disaster many times before. The Black Sox scandal of 1919, the Pittsburgh cocaine trials of the 1980s and the eight work stoppages since 1972 represent just a few of baseball's foibles over the years. And the game still attracts more than 70 million paying fans a year.
"This is a terribly resilient sport, so I'm still bullish long-term on baseball," Galatioto said. "We're going to go through some pain for the foreseeable future, but once we get beyond that, baseball will come back. People love baseball. It's that fundamental. And when you have that, there's something to work with."

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