Thoughts about our National Pastime and occasional thoughts for the Good and Welfare of the Reader (and maybe the writer)

Saturday, March 7, 2009

The Economics of Ramirez – The Dodgers Have to Get to the World Series

In my last blog, I revalued Manny’s contract to account for the deferrals and came to the conclusion that his $45 million dollar contract was south of $40 million in net present value.

Now, I want to look at the investment from The Dodger Perspective.

Doing that is much trickier. One of the top authorities on the economics of sports is the University of Pennsylvania’s Wharton Sports Business Initiative. I spoke to Ken Shropshire, the director of the WSBI, who told me that although they have studied and written about The Business of Sports Agents, the economic value of having franchises in a city, and justifications for corporate sponsorships, the have not approached the issue of what return a team might expect from a player contract.

It is not easy to do that because of the opacity of numbers. Simply put, it is hard to penetrate a team’s financial records because they are more or less sole proprietorships, controlled by an individual or a family. As a result, they are not required to divulge much.

So instead of trying to develop a typical ROI analysis, I set out to see how much of a financial burden the contract puts on the team. My most significant source of numbers was Forbes magazine. Forbes makes an annual effort to put together a tabulation of team values that is generally recognized as authoritative or, at least, as authoritative as we are likely to get.

According to Forbes, the Dodgers are a profitable team and a valuable franchise. The magazine sets the value of the Dodgers at $694 million, ranking them 4th in MLB behind only the Yankees ($1,306) the Mets ($824) and the Red Sox ($816). Their notion of value is based somewhat on recent franchise sales, but takes into consideration the worth of the stadium, the market in which they play, the value of being part of MLB and an admittedly elusive number – brand value.

Years ago, I heard a panelist at venture capital conference make the following statement when asked if his company was making any money, “We have made money every year, last year we made more than we spent.” Dodger revenue has increased every year since 1999 and, in the last three years, it has been more than the team has spent – in other words, the team is on a three-year profitability winning streak.

The revenue number for last year $234 million, $103 million of which came from the sale of tickets. The payroll was $132 million and the net income was estimated, again by Forbes, at $20 million.

So, let us play with numbers. We can call the valuation the equivalent of what a manufacturing company might call total assets. And, we can subtract the team’s total debt outstanding ($61 million) to arrive at an equivalent net worth, or owner’s equity, of $633 million.

Side note: Dodger debt is about three times revenue at the end of 2008. When you add in Manny’s deferral ($35 million) the multiple moves to just below five times, which gives the Dodgers another $100 million of borrowing power under the MLB guidelines. That would be enough to sign Pedro Martinez who, by the way, looked good again today in a three-inning stint for the Dominican Republic.

Return on equity is a shareholder measure to see how well management does with the funds that have been provided, in this case the $633 million dollar net worth. At the end of 2008, the Dodger ROE stood at 3.16% -- which is a woeful result.

It is better, of course, than losing money and having a negative ROE; but in the old economy’s normal structure, investors would be looking for ROEs somewhere north of 20%.

So, the Manny question is this: how much revenue has to be generated in order to turn in an ROE of 20%, based on a constant valuation? And, the answer is that the net income would have to move from $20 to $126 million. To achieve that net income, total revenue would have to increase to $330 million from its current $234 (assuming that profit margins remain constant).

Baseball teams report revenue in five categories.

1. Regular season game receipts
2. Revenue from local media broadcasts
3. Post season revenue
4. Local operating revenue (concessions, parking, in-stadium advertising, luxury boxes and other premium seating arrangements, etc.
5. The team’s share of national media revenue

At this point anyone of us can do what if analyses to sort out where the Manny-related boosts will come from. I will just make one or two observations.

A Dodger season’s ticket is currently priced at $5,460 (infield box – good seat) to $336 (nose bleed section). Up the road, the highest price Giants ticket is $3,444. And, down the road, the Padres are getting $3,500. Both of the other NL teams in California are far enough away that competition is not an issue – but comparisons will be made – and the Dodgers do not have much room to jack up prices.

On the advertising front, the Dodgers are vulnerable to a longer-term economic downturn. The way corporations are shedding advertising budgets and pricy luxury boxes, it is not clear that the top end revenue is going to be easy to maintain, much less to increase.

Bottom Line: The Dodgers are going to have get to the post season and say around for this deal to work out economically.

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